When the political status quo of such an important economic and diplomatic power comes to an end, global investors take heed. Of course, we are not talking about the United States. Or even China. Or even Britain for that matter. We are, of course, talking about Germany.
Germany, alone, is a US$3.7 trillion per annum economy; and is the undisputed political leader of the US$12.6 trillion per annum Eurozone bloc, home to more than 340 million Europeans. For nearly two decades, Germany’s politics have been relatively stable. Angela Merkel, today a household name all around the world, has been leader of her centre-right CDU party since the year 2000; and Chancellor of Germany since 2005.
Yet Germany’s political stability is no longer a sure thing. For decades, the German political landscape could be divided in two. The SPD was the party of the centre-left; while the CDU/CSU coalition was home to the centre right. But following the 2008 Global Financial Crisis, the 2011 Euro crisis and the ongoing 2015 migration crisis, the political landscape has fragmented rapidly.
On the left, the SPD has found itself in somewhat of a no-mans-land. As the CDU/CSU shifted to the centre on many issues, the SPD often found itself in continual agreement with their major alternative party. This opened the door to a competing left-leaning party in The Greens – viewed by many young voters as modern and exciting.
The decline in the popularity of the SPD has accelerated sharply of late. As the FT’s Tobias Buck wrote in October:
“Yet it was not until September 24, 2017 – election day – that the scale of the crisis became clear. The SPD, the banner-carrier of the German left for more than a century, had lost more than 1.7 million votes. Its share of the vote had plummeted to 20.5 per cent, the party’s worst result since the creation of the federal republic in 1949 – a ‘crushing’ outcome, recalls Lars Klingbeil, SPD secretary-general.”
Meanwhile, on the right, Chancellor Merkel’s 2015 decision to allow 1.1 million Syrian refugees into the country has given rise to the AfD. This far-right party has gone from mid-single-digits popularity just a few years ago to around 18-19 percent today. Indeed, following the SPD’s recent decision to form a government with the CDU/CSU, the AfD is now officially Germany’s largest opposition party.
Change is in the air. And this only become more certain in recent weeks when Chancellor Merkel announced she would step down as leader of the CDU in December 2018 and not seek re-election as Chancellor in 2021.
Remaining Chancellor until 2021 may not be an option, however. It depends upon who replaces Merkel as leader of the CDU. Elected by internal party delegates, the current favourite to take over the CDU is a 62-year-old gentleman by the name of Fredrich Merz. Merz has been described as an intelligent, bombastic ideologue who supports free markets, low-taxes, is significantly pro-America and a social conservative. Should Merz receive the internal nod, the CDU will likely shift to the right.
How this dynamic plays with the CDU’s left-leaning coalition partner, the SPD, is anyone’s guess. But should they abandon the coalition, the government will end leading to accelerated elections.
On the other hand, should Merz gain substantial support, he is arguably more likely to work with French President Macron – a like-minded businessman – to address some of the structural deficiencies of the European Monetary Union.
At Montaka, we do not try to predict outcomes such as those related to the highly-complex German political landscape. We do, however, spend a lot of time observing and trying to understand the dynamics which are currently taking place. In carefully thinking through the range of possible scenarios that could play out over time, we have a better chance of positioning the Montaka portfolio in ways that can thrive under all of these possible scenarios.
Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.