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Germany: Hope for a grand coalition – BMO CM

Jennifer Lee, Senior Economist at BMO Capital Markets, suggests that Germany should be basking in a positive glow right now. After all, Europe’s largest and strongest economy has everything moving in the right direction: real GDP is rising at its fastest pace in six years (+2.8%), unemployment is at a postreunification low (5.6%), consumer confidence is at a near 17-year high, and business confidence is at a record high, she further adds.

Key Quotes

“And, more ECB members are finally coming around to the conclusion that its QE program should be winding down, just as the Bundesbank has been calling for.”

“But the glow is certainly not all positive. The failed attempts to form a coalition government are unsettling, and strong leadership is needed given the new mix in the Bundestag (the AfD now has a presence). The options aren’t appealing: 1) another election would take months (spring 2018?) and there is no guarantee that the results would be more conclusive for the CDU/CSU; and 2) a minority government would be terrible; Chancellor Merkel would have to discuss every single bill with the other parties (nothing would get done). There has also been talk about Merkel stepping down, but there is no politician with her experience that commands as much power as she does. That would put Germany on a weaker footing on the world stage, leaving it to France to take the reins. Is that what they want?”

“There is hope, however, that a grand coalition could be revived. Although the Social Democrat’s Martin Schulz has stubbornly refused to form another coalition, he is wavering. After his party’s huge defeat in the recent elections, pressure from his party to reconsider his stance and from German President Steinmeier to put the good of the country first, Schulz has agreed to hold talks with the CDU/CSU this week. That’s a positive first step. Our Stephen Gallo, Head of European FX Strategy, sees another SPD-CDU/CSU grand coalition to be modestly EUR-positive, but “the neteffect of a grand coalition over the medium-term will be to repress the tension which led to a shift towards the right in the very first place.”

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