Fisher Investments Editorial Staff
Developed Markets, Politics, Investor Sentiment

What’s Brewing in Germany

By, 09/29/2009

Story Highlights:

  • Germany held general elections on Sunday. Somewhat unexpectedly, center-right parties won the majority of parliament seats, ending a four-year, power-sharing coalition between Germany's center-left and center-right.
  • Businesses are regarding the election results as a positive—the center-right parties are known to be business friendly.
  • Some see the potential for significant German policy changes ahead. But structural problems, and politics as usual, will prove to be an obstacle to reform.
  • Often, pro-business parties storm into office pledging reform, only to later disappoint businesses and investors as they yield to public and political pressures.

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With Oktoberfest in full swing, perhaps voters can be forgiven for turning out in record low numbers for Sunday's German general elections. (After all, political fervor and hangovers rarely go hand-in-hand.) Politicians' lackluster and noncommittal campaigns didn't help either—incumbent Chancellor Angela Merkel's election performance was dubbed a campaign on valium. But end results proved apathy wasn't the only winner in the elections—center-right parties won the majority of parliament seats, ending a four-year, power-sharing coalition between Germany's center-left and center-right.

Merkel secured a second term as German Chancellor—not too surprising given the lack of notable contenders. Merkel's political party, the conservative Christian Democratic Union (CDU), and its Bavarian sister party, the Christian Social Union (CSU), won 33.8% of the national vote. The CDU's pro-business ally, the Free Democratic Party (FDP), won 14.6% of votes—the most votes in the party's history. Somewhat unexpectedly, however, the center-left Social Democratic Party (SPD)—often an obstruction to Merkel's proposed reforms—lost significant ground in the elections with only 22.9% of the vote.

Businesses are regarding the election results as a positive. The German DAX stock index also reacted favorably. The center-right parties are known to be business friendly. The FDP, in particular, aggressively champions reducing and simplifying taxes, relaxing business regulations on labor and investments, reducing government spending, and pursuing free market reforms. If a coalition is reached between the CDU, CSU, and FDP—which is likely—the conservative center-right will have 332 seats in the parliament, higher than the 309 seats needed for absolute majority. (German parliamentary politics is a coalition game—there are many viable parties, not just two, so in the wake of elections, parties must ally with one another to wield majority power.)

Some see the potential for significant German policy changes ahead. But structural problems and politics as usual could prove to be obstacles to reform. Support for deregulating the labor market will face stiff opposition from labor unions and public opinion. Income tax reduction could prove difficult as politicians favor reducing high government debt. Germany's aging population could weigh on the welfare state, further restricting the government's ability to maneuver around tax cuts. Reducing government spending by retracting subsidies for companies and industries could raise unemployment rates and further stress the economy. Plus, politics themselves will likely hold back significant reform. Bickering, posturing, and power plays are no less common in Germany than elsewhere—even among groups with similar political dogmas. As the US has shown starkly of late, even strong majorities can get mired very quickly.

There may be an ideological shift in Germany's parliament, but whether that translates to a true shift in policy remains to be seen. It could very well be markets are simply breathing a sigh of relief that the status quo remains. After all, markets tend to fear change most, and Frau Merkel has always talked big, but delivered less throughout her tenure. Often, pro-business parties storm into office pledging reform, only to later disappoint businesses and investors as they yield to public and political pressures. Many German traditions have remained intact throughout the years—perhaps the political status quo will do the same looking forward.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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