September 27, 2017— On Sunday, Germany held general elections for the Bundestag, its lower house of parliament. This election was the last in a series of 2017 European elections in which right-wing, anti-immigrant parties and candidates challenged centrists. Earlier this year, centrists soundly defeated extremists in both the Netherlands and France. In the campaign for German elections, yet another extremist right-wing party, the Alternative for Germany, posed a serious challenge to Chancellor Angela Merkel’s Christian Democratic Party. The Alternative for Germany’s third-place finish has forced Merkel to seek new coalition partners in smaller parties. We examine what happened on Sunday, why it happened, and what we expect going forward.
- Chancellor Angela Merkel’s center-right Christian Democrats placed first, winning one-third of Bundestag seats.
- Martin Schulz’s center-left Social Democrats placed second, winning one-fifth of Bundestag seats.
- Both parties lost votes to the neo-fascist, anti-immigrant Alternative for Germany, which won 12.6% of the vote. The Alternative performed particularly well in poorer eastern Germany.
- Both parties also lost votes to the pro-business Free Democrats, which won 10.7%.
- The Social Democrats have decided to exit their longstanding coalition with the Christian Democrats and lead the Bundestag opposition
- The Social Democrats’ departure from the coalition forces the Christian Democrats to woo the Free Democrats and Greens as coalition partners.
Source: Federal Returning Office, Germany’s official elections certifications commission
Why did the Christian Democrats and Social Democrats lose seats?
- Chancellor Merkel’s decision to admit almost a million Mediterranean migrants undermined her personal popularity and boosted support for the Alternative for Germany.
- Russia undertook an active disinformation campaign to undermine Merkel.
- Some centrist voters simply saw the need for fresh leadership, and decided to switch their votes from the Merkel/Schulz coalition to the Free Democrats.
- The Social Democrats attribute their loss of seats to the dilution their center-left brand identity within the Merkel-led coalition. By entering opposition, they see an opportunity to refresh their brand and rebuild their base.
Do we expect a three-party coalition government?
- Although it may take months of negotiations, we expect that the Christian Democrats will be able to form a coalition with the Free Democrats and Greens.
- The pro-business Free Democrats have been in coalition with the Christian Democrats at many times in the past, so their participation is all but assured. They hope to fill ministerial positions relating to trade, regulation, information technology, and/or migration. In particular, they hope to have some influence with respect to limiting or rolling back those European Commission regulations that intrude on business.
- The Greens have been in coalition with Christian Democrats at the state level, but not yet at the Federal level. We expect that the Greens will condition their participation on filling ministerial positions relating to the environment and renewable energy. The Greens will likely also require an accelerated closure of coal-fired power plants.
- We expect that the Christian Democrats will continue to control major policy portfolios relating to fiscal policy, foreign affairs, and defense. We expect no change in Germany’s pro-U.S., pro-NATO orientation.
Will Chancellor Merkel resign?
- The chancellor has not publicly indicated her intentions. Nevertheless, given that she has accepted that her actions led to the large loss of seats, it seems likely that she will resign leadership of the Christian Democrats, and thus of the chancellorship itself.
- Although such resignation will most likely occur after Bundestag approval of the coalition, Merkel may already be signaling to the Free Democrats and Greens that she plans to resign after Bundestag approval. This would likely facilitate formation of the coalition.
- We would expect that any new Chancellor will be one whose views are aligned with the views of the new coalition partners and is well-respected in EU and NATO circles.
Will Alternative for Germany enter government or lead the opposition?
- All German political parties reject working with the Alternative for Germany.
- Should Merkel resign, Alternative for Germany would lose its main demon, thereby deflating its sails.
- The decision of the Social Democrats to enter opposition denies Alternative for Germany the prominent role of opposition leadership, keeping them in a marginal role.
What policy changes do we expect?
- Somewhat greater structure to migration and citizenship policies.
- Greater limitations on regulatory actions by the European Commission.
- A more cautious approach to the consolidation of EU authority in Brussels.
- A more flexible approach to negotiations with the UK over Brexit.
- Faster moves on adoption of renewable energy and environmental protections.
Currently, we are overweight international developed market equities. European political stability is one of the critical factors for our investment views.
Sunday’s election may produce a multi-party coalition. This is typical for Germany and many continental European countries. The extreme right and left parties, though now represented in the Bundestag, will most likely play no role in government, nor will they formally lead the opposition. We expect the only change is that the pro-business Free Democrats and Greens will replace the Social Democrats as junior coalition partners for Chancellor Merkel.
Changes to Germany’s policies will be minor, but probably, on the whole, mildly beneficial, and do not change our fundamental views regarding European political stability.
Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC.
These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.
The information on Wilmington Wire has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.
Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain “qualified investors”—that is, investors who meet certain income and/or investable assets thresholds. Past performance is no guarantee of future results. Investing involves risk and you may incur a profit or a loss.
Any positioning information provided does not include all positions that were taken in client accounts and may not be representative of current positioning. It should not be assumed that the positions described are or will be profitable or that positions taken in the future will be profitable or will equal the performance of those described. Positions described are illustrative and not intended as a recommendation outside of a managed account.
Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.
Third party trademarks and brands are the property of their respective owners.