German, Canadian and South Korean Political Happenings in Perspective

Editors’ note: MarketMinder is nonpartisan, favoring no party nor any politician. Political bias can blind and drive investing mistakes. Our focus is only on political events’ potential market ramifications—or lack thereof.

While most talk in America fixates on the incoming Trump administration—or maybe the wobbling probability of a holiday season government shutdown—politics are seeing much more action outside America. Wednesday’s political headlines dwelled on Brazil’s budget wrangling and talk of a speculative attack on the real, which strikes us as an overblown reaction to deficit worries. More significant developments happened elsewhere in recent days: Germany’s government lost a confidence vote, setting up a February snap election; Canada’s finance minister resigned, placing its government on shaky ground; and South Korea’s president was impeached, although that wasn’t exactly startling. What to make of it all? Read on!

Unwieldy German Coalition Proves ... Unwieldy

On the heels of France’s government dissolution—and reformation—Germany is following suit. As expected, Chancellor Olaf Scholz’s minority Social Democrat-Green Party coalition lost a confidence vote Monday, triggering a February 23 snap vote that many have penciled in for a while. This was all more or less known in early November when the formerly tripartite coalition lost a member, leading the opposition Christian Democratic Union (CDU) to call a confidence vote. The election’s timing was basically the sole unknown. Prior discussions pointed to March. Now we have an earlier date.

While the CDU and its sister party—the Christian Social Union (CSU)—are currently leading polls, their 30% support implies they would likely need at least one other party to form a government. With Social Democrats polling in the high-teens alongside the far-right Alternative for Germany (AfD), and Greens in the low-teens—with all others in low-single digits—there is some uncertainty over the next government’s exact configuration. Notably, though, CDU/CSU has ruled out partnering with AfD.

Campaigning could of course change polls—and election outcome probabilities—but markets so far appear to be taking it in stride. Germany’s DAX, hovering near record highs (in euros and dollars), doesn’t appear too bothered, which seems like the correct attitude to us, though sentiment—and volatility—could swing for any or no reason. To this point, the backdrop largely seems to resemble the multiparty morass from earlier this year. For all the sound and fury of a collapsing coalition, little looks different. Still, some uncertainty could ease early in the year as the parties release their platforms and the race shapes up—especially if we get another complicated government incapable of passing much.

Canada’s Budget Beef

Also on Monday, Canadian Finance Minister and Deputy Prime Minister Chrystia Freeland resigned unexpectedly over budget disagreements with Prime Minister Justin Trudeau—triggering a media firestorm. Most alarm seems to hinge on her resignation letter’s argument that Canada should “[keep] our fiscal powder dry” to combat potential US tariffs from the incoming Trump administration. This cuts against Trudeau’s plans for a sales-tax holiday and cash handouts ahead of elections due by October 2025.

Some seized on Freeland’s fiscal comments, suggesting Canadian finances aren’t up to snuff. But like the rest of the developed world, data tell a different story. Canada’s 10-year yield is 3.14%.^[i] That is up from early December’s 2.99%, but not materially—and it is down from April’s high of 3.86% and late November’s 3.44%. These figures are historically low and not about to break the bank. Consider Exhibit 1, which shows Canadian debt service rising relative to revenue, but nowhere near late-1980s/early-1990s levels—which weren’t problematic then. This is a molehill, not a mountain.

Exhibit 1: Canadian Debt Is Easily Serviceable

Source: Statistics Canada, as of 11/29/2024.

Furthermore, even Freeland’s budget update—which many pundits hyped as showing deficits exceeding earlier targets—put the deficit-to-GDP ratio at just 2.1% in fiscal 2023/2024 and projects a decline to 1.6% next year.^[ii] Folks, 2.1% is low enough to raise the question, “Why is anyone even talking about this?”—especially in a country with globally low debt metrics.

Now, Freeland’s resignation has rekindled expectations for—and uncertainty over—an early federal election, which many think would lead to Trudeau’s Liberal Party’s ouster, based on recent polling. While this extends gridlock in Canada, the potential for government change could raise uncertainty somewhat early in the new year. That could present headwinds to Canadian returns (although the market’s sector concentrations may prove more meaningful). It is a matter worth monitoring as developments continue to emerge.

South Koreans Impeach President—and Uphold Rule of Law

Following a botched martial law declaration two weeks ago, South Korea’s President Yoon Suk Yeol was impeached December 14. This was the opposition Democratic Party’s (DPK’s) second try. This time, it passed with 12 votes from Yoon’s People’s Power Party (PPP), bringing the margin to 204 to 85 in the 300-seat unicameral National Assembly. But Yoon’s unemployment isn’t a done deal yet. The Constitutional Court is now conducting the trial and must rule within six months. If it supports his removal from office, then an election would be held within 60 days—well ahead of 2027’s scheduled vote.

Precedent is limited and inconclusive. In 2004, the Court overturned President Roh Moo-hyun’s impeachment, but it upheld President Park Geun-hye’s in 2017. Complicating matters, the nine-member Court is currently short three justices, and six are needed to sustain an impeachment motion. Two standing judges’ appointments expire in April 2025, and new ones require the approval of Acting President Han Duck-soo, a non-partisan career civil servant. The DPK is pressing Han to confirm proposed judges to the vacant slots for a speedy trial, but the PPP—lagging substantially in polls—is seeking to delay proceedings. With the Court’s composition in question, so is a verdict, its timing and the likelihood of elections next year.

South Korea, though, has been through similar circumstances before. Although down from crisis levels, political uncertainty remains elevated for the time being. When there is a ruling, it should provide some relief—though the timing is unclear. In the meantime, remember politics are just one stock driver. They aren’t the be all, end all for markets.