Germany's federal election in the fall of 2017 will take place amid a time of political uncertainty and subsequent fallout facing several key members of the European Union (EU). The international election season of 2016 and 2017 has been hotly contested, featuring a widespread injection of nationalistic themes into ongoing political debate.
The election marks the conclusion of a surprising and historic electoral cycle:
|United Kingdom (U.K.)||Vote For Brexit||June 2016|
|United States (U.S.)||Presidential election||November 2016|
|Italy||Italian referendum||December 2016|
|Netherlands||Parliamentary election||March 2017|
|France||Presidential election||May 2017|
|Germany||Federal election||September 2017|
Germany's federal election has the potential to create considerable anxiety and have widespread implications throughout Europe. Although the financial relationship between Germany and the U.K. is one of the most substantial in all of the eurozone, political uncertainty may serve to impact economic growth and currency valuations.
The Trade Relationship Between The U.K. And Germany
Business and governmental interests in the U.K. will undoubtedly be watching Germany's election with a sharp eye. The extent of the economic relationship between the two countries has grown in recent decades, making any change in leadership a considerable event.
The size and scope of each nation's economy is extensive, largely due to a high degree of political and financial cooperation. Germany serves as the largest economy in the eurozone, with a GDP (in terms of purchasing power parity) ranking sixth globally. As a close third behind Germany and France in the eurozone region, the U.K. earns a global rank of tenth in GDP (in terms of purchasing power parity).
Perhaps the strongest reason for the elite GDP rankings of the two nations is the depth of their interrelationship when it comes to foreign trade.
Germany serves as the U.K.'s second-largest export destination as well as its largest source of imports. The U.K.'s exports to Germany primarily consist of:
- medical equipment,
- car components,
- pharmaceuticals and
- petroleum products.
Conversely, the U.K. is Germany's 3rd largest destination for exports and acts as a top-ten provider of its imported goods and services.
Essentially, the trade relationship between the two nations consists of raw materials and machinery components from the U.K. in return for finished products from Germany. This dynamic has created a growing trade surplus for Germany with the U.K., measuring 1.7% of GDP for year end 2016. A large portion of this surplus is attributable to the sale of automobiles from German producers to U.K. consumers, an industry valued at over £25 billion annually.
The industrial trade alliance between the two nations is a source of sizable wealth for each side, somewhat attributable to some of the EU's trade policies. Goods and services have flowed more freely between member countries, with the Germany-U.K. trade relationship being a beneficiary.
Brexit Vote Of 2016: An Evolving Economic Atmosphere
While the adoption of standardised trade across Europe bolstered some alliances, various policies promoted by the EU did not come without scrutiny. A few of the most hotly debated policies included:
- Assorted tariffs
- The adoption of the euro (EUR) as a common currency
Opposition to the EU as the governing body of Europe came to a head during the U.K.'s Brexit vote of 2016. By a sustained margin of 51.9% to 48.1%, the voting public chose to "leave" the EU. The outcome came as a surprise to many and created vast economic uncertainty for the U.K. as well as other members of the EU. Ideals based upon relative isolation and protectionism threatened to destabilise the economic environment.
In effect, one result of Brexit was the revisiting of previously negotiated trade deals. German Chancellor Angela Merkel addressed this concern shortly after the results of Brexit were known. In opposition to the views of many prominent EU leaders, she suggested that "compromise" regarding the U.K.'s desire to secure its borders and restrict "free movement" may be the best policy to ensure economic growth for the countries of the eurozone. While the Brexit vote's outcome was a definitive statement made by the electorate of the U.K., German leadership attempted to preserve the trade relationship at political cost to the EU member nations.
The economic fallout from the Brexit vote was immediate and conclusive for both the U.K. and Germany. The GBP and EUR's values fluctuated wildly under enhanced short-term volatilities. The subsequent months brought a stiff depreciation of the GBP/EUR, trading from a high of 1.4000 in early 2016 to a low of 1.1000 at year's end.
The depreciation of the pair's value has created turbulence in the import/export relationship between Germany and the U.K. The cheaper pound will likely help the U.K.'s export sector, but it may very well hinder German exportation to the U.K. With many analysts calling for the GBP and EUR to be exchanged at near parity by the end of 2017, changes in each nation's GDP may be in the offing.
At the behest of a new German government, the European Central Bank (ECB) may pursue monetary policy with the goal of achieving exchange rate stability between the GBP and EUR Any policies addressing the currency discrepancy will likely impact future trade agreements between Germany and the U.K.
Germany's Federal Election: Procedure And Contenders
Germany's federal election is a bit different in structure than many other democracies around the world. In contrast to a "winner take all" format where one candidate is chosen to lead by the electorate, German voters choose public officials following a system of "personalised proportional representation." Successful candidates are assigned a seat in Germany's parliamentary body known as the "Bundestag."
In simplest terms, each citizen casts two votes:
- One supports a representative from their local district
- One backs a national party
Victorious candidates from German's 299 districts automatically serve in the Bundestag and are known as "direct mandates." The remainder of the Bundestag is chosen proportionally, in accordance with the national vote selected from a predetermined list of candidates.
After the Bundestag is seated, its members vote by secret ballot to select a new head of government, known as the chancellor. Much of the government's power is delegated through the Bundestag's seats. Party rule of 50% or better is needed to effectively control policy decisions for Germany and typically elect the new chancellor.
Listed below are Germany's prominent political parties and their platforms:
- Christian Democratic Union of Germany (CDU): The CDU is Germany's main conservative party and is a strong advocate for continued participation within the EU.
- Christian Social Union of Bavaria (CSU): The CSU serves as the sister party to the larger CDU.
- Social Democratic Party of Germany (SPD): The SPD is a centre-left platform that champions civil rights, social welfare and integration within the EU.
- Alternative for Germany (AfD): The AfD is a populist platform focused on limiting immigration and scrutiny of EU governance.
- Free Democratic Party (FDP): The FDP is a liberal party, promoting ideals based on human rights, civil liberties, international participation and a free market economy.
- Green Party: The Green Party is a platform based on environmental awareness. It supports renewable energy and sustainable development.
- Die Linke: Die Linke is a strong left-wing platform that supports increased government spending and higher corporate taxation rates.
The CDU and SPD are the dominant political parties in Germany, but they do not enjoy majority status in the Bundestag. The fracture and variety of the political system has caused coalitions and partnerships to often serve to galvanise Germany's government. Affiliations between parties remain fluid and questions regarding potential majorities in the Bundestag are complex.
Listed below are a few of the most recognisable candidates in the race to become the next chancellor of Germany:
- Angela Merkel: Since 2005, Merkel has served as the chancellor of Germany and leader of the CDU.
- Martin Shulz: Former European Parliament president Shulz is the SPD's candidate for chancellor and eventual party head.
- Frauke Petry: Co-chair of the AfD, Petry's candidacy in the election is supported but remains unclear.
- Karl-Theodor zu Guttenberg: He is a former Bundestag member (2002-2011) with affiliation to the CDU. Guttenberg's candidacy remains unclear.
Summary: Potential Outcomes And Impact
As of this writing, the race for chancellor is seen to be a two-person contest between the incumbent (Merkel) and challenger Martin Shulz. Polling data suggests that party affiliations favour Merkel as the early front-runner, but Shulz still has an opportunity to gain ground over the course of electoral process.
The election's impact on the U.K.'s economy is a challenge to forecast, but a few things are clear. If new German leadership promotes economic policies encouraging robust trade with the U.K., then positive growth is a possibility. In the event that the election's victor chooses to take a hard line stance against the U.K.'s Brexit vote, then a contraction in GDP led by reduced trade with Germany is possible.
The value of a domestic currency is the key determinant of any nation's prosperity. One prominent global investment bank is projecting the GBP to be valued at par with the EUR by the end of 2017.
In the event that the new governing body of Germany chooses to forego the stabilisation of the trade relationship with the U.K., there may be a formidable challenge when it comes to restoring confidence in the GBP, EUR and entire eurozone.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…