Political Happenings in Germany and Ireland

Editors’ note: MarketMinder Europe is politically agnostic, favouring no party nor any politician. Our analysis focusses on elections’ potential market ramifications only.

Whilst the world’s eyes fixated on US politics last week, ructions in the eurozone arose. In Germany, the fragile three-party stoplight coalition splintered.^[i] And in Ireland, a snap election is now set for later this month.^[ii] So as political uncertainty falls in America, we think it looks set to rise, if briefly, in Europe. But like the US, this too shall pass, in our view, setting up relief—a tailwind for markets.

Germany Now Down to a Red-Green Coalition in Time for Christmas

German Chancellor Olaf Scholz of the Social Democratic Party (SPD) sacked Finance Minister Christian Lindner on Wednesday over budget disagreements.^[iii] This may seem like mere personnel matters in the government, but the trouble is Lindner leads the pro-business Free Democrats (FDP).^[iv] In response, the FDP (the yellow light) quit the tricoloured coalition, leaving a minority SPD and Green government.^[v]

We think this was something of a surprise to markets. Squabbling in an ideologically divided government isn’t shocking to us, but Germany now goes from fractious coalition to hamstrung minority. Even less legislative action likely results from this, in our view, extending gridlock. But we find it also raises uncertainty over early elections. The opposition centre-right Christian Democratic Union (CDU)—which leads in polls—called for a confidence vote this week, which if Scholz didn’t win, would trigger a January snap election.^[vi] Although Scholz dismissed this, he obliged with a later confidence vote 15 January, setting up a potential March contest ahead of the originally scheduled 28 September one.^[vii]

Meanwhile, as the government’s popularity sinks, the far-right Alternative for Germany (AfD) and pro-Russian leftist Sahra Wagenknecht Alliance (BSW) have drawn support, weighing on investor sentiment.^[viii] This adds to alarm over the rising power of new, extreme parties amongst commentators we follow. But the likely electoral outcome, whenever it happens, is another unwieldy coalition.^[ix] Functionally, this wouldn’t be too different from today’s gridlock, in our view. But exactly who and how is an open question, which we think is worth noting and monitoring.

Ireland’s Taoiseach Tries His Luck

Irish Taoiseach Simon Harris asked President Michael Higgins to dissolve the Dáil. By law, a snap election must happen between 18 and 30 days thereafter.^[x] Hence, the Emerald Isle is now set to hold a snap vote on 29 November.^[xi] This is as Harris and his Fine Gael party are riding high in polls alongside coalition partners Fianna Fáil and (to a lesser degree) Green Party following budget giveaways from a huge tax haul this year, largely courtesy of US Tech giants headquartered in the country.^[xii]

Meanwhile, the main opposition Sinn Fein is in disarray after leading polls the last three years, having shed support from internal divides over its immigration platform and a series of scandals.^[xiii] So whilst the ruling coalition could consolidate and extend its power, with no single party polling over 30%, the return of a largely gridlocked coalition still seems most likely to us.^[xiv] But, as in Germany, we think a lack of clarity on its specific makeup means we could see somewhat elevated political uncertainty ahead of the vote.

For investors, politics is just one driver. Something to pay attention to, in our view, but don’t lose sight of what moves markets most: surprise. Some political outcomes could shake outlooks for Germany’s and Ireland’s economies and earnings. But absent those, we think overall gridlock and falling uncertainty are fine for stocks. Gridlock may annoy voters, but when governments are hamstrung, we find it harder for them to extend alarm over big policies creating winners and losers. For investors and businesses, we view this as a benign backdrop for risk-taking and returns.