All of this is very confusing to many people (including me), since German politics is profoundly more boring to the untrained eye than the personality politics of the UK & US (and even many others in Europe like Italy, France, Spain etc).
So what I'm going to do in this article is just try and explain what on earth is going on, provide an outline of who's who and generally keep things quite simple in terms of the various policies of the different parties. At the end, I'll throw in a bit of a spin for financial markets, but I'm going to try and be as factual and concise as possible to end the befuddlement surrounding this issue.
What is the vote for?
The vote on the 26th of September will require the German people to cast their ballot for the lower house of federal parliament - The Bundestag. The process involves casting two votes - one for a first part the post style member of parliament, and the second for a political party. The Bundestag is composed of at least 598 seats (there are currently 709). The distribution between parties is shown below:
At Least 598 seats... how can they have a variable number of seats?
Indeed to UK or US observer, this seems frighteningly odd... a variable number of seats? How can this be? Of course the UK House of Commons has a fixed (albeit adjustable) 650 seats up for grabs at a general, and the US Presidential election has 538 electoral college votes and so on.
The reason for this is the unique electoral system the Bundestag uses whereby seats are allocated 50% on a proportional representation basis, and a 50% First-Past-The-Post system like in the UK.
Only read the next part of this section if you're feeling brave :)
There are always 299 land lists awarded - this is like the constituencies system in the UK. Then the proportional representation component comes into play for the other 50%. But then, adjustments are made to ensure that the population of each "land list" is representative of the number of seats awarded. Then based on this calculation the "political party" section of the vote is calculated and then awarded proportionately to all parties.
The number of FPTP winners and Proportional Representation winners are compared, and the highest of these two is the parties minimum number of seats in the Bundestag.
This adjustment though means that there will overall be more than 598 seats across all land lists, and therefore further adjustments need to be made to ensure there is proportionately with the number of votes awarded.
For the Maths-y among you... see: Webster / Sainte-Laguë method for further information
This is a very complex process, but the link below explains in a lot of detail about the various maths involved if of interest.
So what happens once all the votes are in?
Well at this stage there will likely be a lot of wrangling as no party is likely to gain an outright majority. This means there will be a period of negotiations as an attempt is built to form a government. Then likely the biggest party within the coalition will have their head become the Chancellor.
Who's Who?
So onto the important section... who is leading each party and what does that party stand for?
The Christian Democratic Union (CDU):
The CDU is Merkel's Party and is being headed up in this election by Armin Laschet (pictured below). If the CDU is able to maintain its chancellorship via a coalition with the other parties (currently the coalition is with the SPD) then this will likely be business as usual for Germany.
The moment it started to go wrong for Laschet - spotted laughing in the midst of the terrible flooding which hit Europe earlier this summer.
On the political spectrum, the CDU is the centre-right party in Germany. Specifically, it is liberal on economic issues but conservative on social ones. The CDU is very euro-centric.
Basically, any victory for the CDU whereby Laschet becomes Chancellor is a continuation of the status quo.
The Social Democratic Party (SPD):
The SDP was, at one point, running third in the polls. Now it has moved into the lead, with Olaf Scholz (pictured below) the candidate who would become Chancellor. It's a little bit of a weird situation since both the SPD and CDU are currently forming part of the government, and Scholz is the current finance minister. He therefore has to explain why he, alone and without the CDU, would be better for Germany.
Scholz is now the frontrunner to replace Merkel
On the political spectrum, the SPD is the centre-left party and it's interesting to me that Scholz was one of the pioneers of the Next Generation EU Bailout Fund worth EUR750bn. The SPD generally has been in favour of modernising and globalising the German economy, but also believes in the "social" aspect of governance and addressing the needs of the poor.
Unsurprisingly for a German Party though, the SPD has also historically been very careful with Budget Deficits, this all stems back to the Weimar hyperinflation of the 1920s. One significant difference under an SPD chancellorship could be increased regulations on the banking sector.
Right well that's the two top contenders done... I'll be much briefer on the rest.
The Greens:
Most of this party's views is in the name. Unsurprisingly the green party is for greater and faster green-ification of the German economy. Under the leadership of Annalena Baerbock (pictured below), the Greens have done relatively well and are currently polling in third place with about 16.2% of the vote.
The Green Party could be significant as a coalition maker and is likely to feature in any coalition with either the CDU or the SPD (although one with the SPD appears more likely for now).
What is potentially interesting about the Greens is that one of their main policies is to temporarily suspend Germany's restrictions on new borrowing to hit climate objectives. This is quite a shocker to a country as debt conscious as Germany, but the greens are polling well and greater moves toward greening the economy are likely in any coalition with them.
The Free Democratic Party (FDP):
The FDP is socially more relaxed than the CDU but slightly more economically laissez-faire than the SPD. You can see that most German parties who poll well fall somewhere in the centrist camp. It has served as a coalition partner with others over the years.
Led by Christian Lindner (below), the FDP could well be an important cog in any coalition, as the major parties are unlikely to want to partner up with the left or the AfD.
The FDP is polling around 11% at the moment
What is perhaps most interesting about the FDP is that it has definitely transformed itself in the last year from a relatively minor party to one which could decide who becomes the next Chancellor of Germany. The AfD has declined dramatically in popularity from the last election highs and the FDP seems to have picked up some of the pieces.
The AfD:
Always over-talked about in my opinion given they are unlikely to feature in a government since both the CDU and SPD are strongly opposed to a great many of their policies.
As we know, the AfD is the far-right populist party and opposes immigration and further European integration. You might say this is my own biases coming through... and I'd agree with you. But so do the most likely scenarios outlined below (source: The Guardian).
This is the anti-capitalism party formed from the remnants of the old communist parties. This party doesn't particularly like the centrism of all the other major parties and would rather see a more socially constructed system.
They are more worth a mention than the AfD because there is a small chance they could find their way into a coalition... they were aiming to court the SpD and the Greens primarily.
So what is the impact for financial markets?
Basically the key thing to watch is what the outcome means for government spending in Germany. If we had a coalition which was less committed to the fiscal budget (one involving the Greens for example), then this means we could well see greater issuance of Bunds, increasing the supply and causing a sell-off in the price of these Bunds.
Over the last couple of weeks, we have seen a notable increase in the 10y Bund yield, and perhaps this is starting to reflect the belief that the CDU/CSU may not get back into power (or more likely, it's related to broader market moves... but let's say the election counts for something ay?).
An SPD led coalition with the CDU and Greens therefore would likely be a driver for higher yields. One of the promises of the SPD is an obligation to invest which would require a minimum % investment in education / transport etc in each year.
Likewise, all of these parties are committed to the European Project and would probably support giving the EU more powers over expenditure - especially in light of the fact this has now begun with Next Generation EU.
If you see the Red-Red-Green outcome a la the polling chart above this could be pretty bad for Bunds too and yields would be quite likely to spike higher. Obviously, the polls don't point to the syet, but it could be relatively close.
Let's not forget though... this is Germany we are talking about. Nobody is going to rip up the script and go hell-for-leather on government spending, so expect all moves to be moderate and well thought through.
Is there a trade worth pursuing here?
BUY EURUSD?
This could well be a trade worth pursuing in the run up to the election in my view, especially once Fed uncertainty has eased next week.
If political change is afoot in Germany which prompts them to loosen their fiscal taps just a touch, then I think this is good for not just German growth (and... therefore... inflation prospects) but also for the European Project as a whole as it seems we may well see greater cooperation and spending with the whole Euro Area.
What does this mean for the ECB? Well we could see a more inflationary environment and if this persists then maybe hikes on the horizon... let's not talk too soon though :)
Here endeth the lesson. Any questions let me know and I'll periodically update this over time.
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