Latest political wave of uncertainty to rock European Union
It is the latest political wave of uncertainty to rock the European Union, Germany (the eurozone’s largest economy) is in political limbo just two months after its general election. Chancellor Angela Merkel’s efforts to form a government in Germany collapsed on Sunday (19 November).
Merkel’s conservative alliance won the September election with a slim majority, in fact, Merkel’s governing Christian Democratic Union of Germany has secured its weakest support since 1949. Moreover, it is not enough to form a majority in parliament.
So the long-time German leader has been trying to form a coalition majority government. But a hopeful political alliance with the pro-business Free Democratic Party and the center-left Greens collapsed late on Sunday.
The collapse of coalition talks in Germany is the latest political wave of uncertainty to hit the European Union
Indeed, 2017 has been a year of political uncertainty in the EU. First Brexit, the ongoing Greek sovereign debt crisis, the French elections, the Spanish Catalonia push for self-rule and the rise in support for nationalist parties.
But will Germany’s political wrangling over forming a majority government, be the latest political wave of uncertainty to rock the EU, be the straw that breaks the camel’s back?
What if one of the founding members of the EU and the eurozone, Germany suddenly, unexpectedly loses support for a politically, economically unified superstate Europe with an independent defense and foreign policy?
Merkel’s Germany has played a major role in riding the waves of political uncertainty from steering Germany through a financial crisis to the Greek crisis.
But what if Europe’s great Europhile, Merkel is unable to form a coalition government and falls?
That is a possibility, bearing in mind that Merkel has shed a lot of political capital over her open border immigration policy.
Her decision to let in hundreds of thousands of refugees and migrants from Syria and other countries in 2015 coupled with a corresponding rise in crime has played into the hands of domestic opposition parties.
Indeed, the main beneficiary of open border policy has been the anti-immigration party Alternative for Germany which gained strong support in September’s election, winning some 13% of the vote.
So the prospect of Germany, which accounts for 28% of the euro area economy remaining in a protracted political limbo could keep euro investments on hold and the financial markets on edge.
Speaking about the latest political wave of uncertainty to rock the EU Kisoo Park, a global bond manager at Manulife Asset Management in Hong Kong said,
“It’s very concerning, and creates this big uncertainty in the eurozone,” said Kisoo Park, a global bond manager at Manulife Asset Management in Hong Kong, adding that he expects the euro to fall further in the short term.
The euro has remained fairly resilient despite a wave of political turmoil hitting the region. Spain’s crackdown on the region of Catalonia after it declared independence has been deemed illegal. Europe has its first political prisoners since WWII. A Spanish judge has jailed eight members of former Catalonia government.
Meanwhile, the UK’s Brexit (which has an implication on trade) is on a road to nowhere.
Nevertheless, the euro remains surprisingly resilient despite all these ongoing political problems. The euro has surged nearly 12% against the U.S. Dollar, approximately 7% against the yen and 4.4% against the British pound so far in 2017.
But that could all change, bearing in mind that Germany is now in political limbo and may no longer be bedrock country in the region. Whats more, the latest wave of political uncertainty could also cause a cascade of fallouts on the Brexit talks and the parliamentary elections due next year in Italy.
So how could this political turmoil play out in Germany?
In the immediate term, Merkel will continue to lead a caretaker government. Merkel will then have two options, either she could make a second attempt to form a ruling coalition government if she fails then her last option is for Germany to call a new general election.
What are the implications for the financial market?
Financial markets don’t like uncertainty so this latest political wave of uncertainty to rock the EU is likely to provide headwinds on the euro and euro risk assets.
If price discovery were allowed to play out we would most likely see the euro slide along with euro stocks. Moreover, euro bond yields would also rise. That is pretty much what we saw in Asia and the first hour of trade in Europe. Euro future was down 0.6 percent together with the euro.
But the way to gauge these markets is not to assess how assets would respond to a certain crisis but rather what the central bank will do in response to that crisis.
So in this instance, the European Central Bank (ECB) stepped in and made sure that there was no run on the euro and euro stocks.
Put simply trading these markets is about front-loading the central bank’s next move. Learn three of Darren Winters best investment strategies and you will be ahead of the game.
The economic data indicates that the eurozone economy is on track for its strongest year since 2007, though growth slowed slightly in the third quarter and inflation fell. But despite the combination of improved economic growth and low inflation the ECB is still operating emergency monetary policy through its APP it is buying 30 billion euros a month of assets (also known as quantitative easing).
So what is the ECB buying?
Take a look inside the ECB’s asset purchase program (APP)
Practically everything. From assets backed securities, covered bonds, public sector securities and corporate bonds. The public sector programme accounts for 85% of the euro system purchases and has been in operation since March 2015.
In short, the ECB (through its APP) is ready to halt a downward slide in asset prices and (prevent true price discovery) all in the name of price stability. In other words, will do whatever to keep asset prices up, the euro stable and the banks solvent.
So when pundits talk about a collapsing Euro and Euro equities perhaps they need to step into the Alice and Wonderland matrix of fairytale markets, after all, it is a stock bull market by default.
Will the Europeans give up on the EU?
If you have a good grasp of European modern history you’ll figure out that is as much likely as the Jews giving up Israel-it is ideologically driven.
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