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Flash German exit poll poses more questions than answers, as Merkel won’t likely be giving up the top job just yet

By Matthew Cady, Investment Strategist at Brooks Macdonald

What has happened

Voting has just closed in Sunday’s German federal election. The flash exit poll might be out, but the vote prediction is posing more questions than answers. Both the CDU/CSU and the SPD are indicated to be tied at 25% share of the vote each. The Greens are indicated at 15% and the FDP at 11%. From the flash exit poll it is still not clear which party will ultimately declare victory. With no one party securing an overall majority, a coalition government is expected but negotiating this will mean a lot of uncertainty, not just politically, but also for markets in the coming weeks, and possibly months.

What does it mean for markets

The only certainty near-term is uncertainty. As far as settling the German political outcome, today’s election is really just the end of the beginning, and horse-trading between the main political parties is  now expected to jump up a gear or three. Markets however, just like nature, abhor a vacuum. Markets have long memories and will remember the last German federal election in 2017, when it took close to six months to agree on a government. With European economies still recovering from out of the shadow of the pandemic, that amount of time potentially spent in political gridlock is not a luxury that Germany’s politicians can afford.

What does Brooks Macdonald think

Europe’s economies and financial markets are still very dependent on central bank and government spending support, but the current political air-pocket that looks likely in Germany suggests less, not more flexibility on policy in the very near-term. Longer-term, with EU monetary union but individual member country fiscal sovereignty, sitting at the heart of this nexus is the prevailing political will. The ultimate conclusion of Germany’s federal election carries important implications for future policy direction for both Germany and the wider EU. Until a new government can be agreed on, Merkel is likely to stay on as a ‘caretaker’ Chancellor in the interim, but for whoever takes over from her, it is no exaggeration to say that they will have some very big shoes to fill.

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