European shares held onto gains into the close on Monday, as good news for beaten down banks and autos and generalized risk-on sentiment managed to carry the day despite what looks like the beginning of the end for Angela Merkel.
The Street has had a few hours to digest news that the Chancellor will step down as CDU party leader and will not seek re-election in 2021.
This is, frankly, an unfortunate development to the extent you view Merkel as the guardian of a Western democratic order that is under siege on a daily basis. It’s also tragically ironic, given that it was Merkel’s open-door migrant policy in 2015 that in many ways allowed populist sentiment to reach critical mass on the way to upending centrist politics in Britain, the U.S. and Italy.
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“It is unclear at this stage whether Mrs. Merkel retains enough clout within her party to ensure her candidate gets the top job [and] a key factor determining the next leader will be the party’s political direction”, BNP writes, adding that they “would expect the CDU to nudge itself rightwards in an attempt to recover some political ground lost to the far-right AfD.”
For now, BNP doesn’t see much in the way of serious change for the German government’s policies, but disconcertingly, the bank notes that “even if Mrs. Merkel does stay on as chancellor, we think she is likely to be in a weaker position than before, as will Germany on the European stage.” That is exceedingly undesirable in a world where Germany represented an anchor in a sea of geopolitical uncertainty.
For their part, BofAML writes that “the risks of the coalition breaking up are highest next summer, post EU elections, around elections in Eastern German states in September/ October and the SPD’s half-term assessment of the GroKo.” The bank says it’s possible we could see fresh elections in the second half of 2019.
“This has implications for Europe even in the run-up to these events irrespective of the CDU internal discussions”, BofAML continues, before warning that this is set against a backdrop of reduced stimulus from the ECB, signs of decelerating economic activity and “fragile” politics across the pond. The bank goes on to echo BNP, writing that “German politics are becoming more inward-looking, with less political capital and time for Europe and a less powerful leadership than over the last decade or so.” Clearly, this should be seen in light of the ongoing budget drama in Italy and the seemingly intractable Brexit situation.
“It was widely expected that Merkel would not run for re-election, however the timing of the announcement was a surprise and could safeguard her Chancellorship though bringing forward the question of her succession to this year”, Goldman says, weighing in, before reiterating their view that “while Sunday’s results are damaging for the coalition parties in the federal government, snap elections remain unlikely.”
As far as Merkel’s CDU successor, SocGen says that “should it be a race between Kramp-Karrenbauer and Jens Spahn, the former might have the upper hand, especially as the Bavarian election suggested that a more aggressive stance on immigration was not the vote-winner many had hoped.” As far as the outlook from there, SocGen offers the following:
The lack of a clear successor will leave us with uncertainty in the coming weeks. Moreover, the SPD could at some point soon (not immediately) also like to take a time out to reflect on its best options ahead of the next election. It also remains unclear how well Merkel would work with a new party leader, especially as the new leader would presumably need to distance the new CDU from Merkel in some way. We thus see a high probability that Merkel will leave earlier than 2021, allowing the new leader to fight the next election campaign on her/his own terms.
Meanwhile, Bloomberg’s Cameron Crise draws a historical parallel with the U.K. and Australia. “Merkel reminds me of two other long-standing right-of-center leaders that were eventually chucked out thanks to their unpopularity with the electorate and/or the party machine”, Crise writes, on the way to noting that “in the case of both Thatcher and Howard, not only did growth fall back after the removal of the long-standing leader, it dropped well below the level prevailing prior to their assumption of power.”
Whatever the case, this isn’t a great day for Western democracy. Then again, everyday seems like a bad day in that regard post-2015.
