After 16 years as German chancellor, Angela Merkel’s exit is set to dramatically change the political landscape in the European powerhouse. Ahead of this Sunday’s election, T. Rowe Price’s Tomasz Wieladek and Mirabaud Asset Management’s Hywel Franklin discuss the likely economic and market implications
Tomasz Wieladek, international economist at T. Rowe Price
German economic policy looks set to change direction, as the Green party is almost certain to form part of the country’s new governing coalition. Current polls suggest an SPD/Green-led coalition is the most likely outcome.
In this scenario, economic policy will take a very different direction to that taken by Chancellor Angela Merkel’s government over the past 16 years. The policies proposed by an SPD/Green party-led coalition will focus on easier access to social benefits, redistribution, and more proactive use of fiscal policy to achieve transition to the net zero carbon economy within 20 years.
The Greens have pledged to spend €500bn over the next decade to accelerate Germany’s transition to renewables, through a combination of infrastructure investment and higher carbon taxes. To help fund these ambitious spending plans, the party has signalled its intention to revise Germany’s so-called debt brake.
The inevitable shift toward a more environmentally focused legislative agenda is likely to prove structurally bearish for bunds – an outcome not fully priced into current valuations. The impact on equity markets will be more mixed. The earnings of groups specialising in carbon intensive activities will likely fall, due to higher carbon taxes. On the other hand, groups helping to facilitate the green transition or providing less-carbon intensive activities would significantly benefit from the major expected changes in government policy – and this should be reflected in share prices.
Hywel Franklin, portfolio manager of Mirabaud’s Discovery Europe and Discovery Europe ex-UK funds
After almost 16 years with Angela Merkel as chancellor, it is not an exaggeration to say Germany’s election marks a significant turning point for the biggest economy in Europe.
Even before July’s catastrophic floods in the Northern Rhineland, green issues were near the top of the political agenda. All parties, other than the far-right AfD, support the Paris Agreement’s target of limiting global warming to 1.5 degrees Celsius – although critics claim these plans do not go far enough. The prominence of green questions in the election debates has been heartening. As a major manufacturer with a huge auto industry, Germany faces a big strategic challenge in greening its industries.
Germany’s national cybersecurity strategy has been a point of contention in this year’s election. This is far from a fringe issue of interest to technical specialists. As both our professional and personal lives move online, protecting the integrity of our digital communications has become a significant strategic priority for governments worldwide. Our funds have significant exposure to this growing sector.
Germany’s famous Mittelstand complex of small-to-medium-sized companies, which pursue global dominance in high-value manufacturing niches, is in the sweet spot for both our Discovery Europe and Discovery Europe ex-UK funds. This has led us to make the country our most significant national overweight in both strategies.