German election and implications for the financial markets

German election and financial markets

Let us face it, Germany is too big and too important for anyone to be able to ignore the possible effects that political developments in this country might have on the euro, the direction of European economic policies or indeed the global financial markets. Binary options traders who have the right answer will have the chance to make some serious cash.

So, let’s take a close look at what is going on, firstly by putting down some facts. Germany is undoubtedly Europe’s largest economy and as such it has the unwelcome privilege of also being the main bailout creditor all the eurozone countries whose economies were struggling and needed rescue plans. It therefore goes without saying that a healthy German economy is imperative for the health of the European economy as a whole. However, simply because the economic wellbeing of Germany depends largely on its exports, and with EU countries being the largest customers for German export products, it is of paramount importance for German politicians to stick to their determination to ensure the stability and cohesion of the EU and especially the euro, the eurozone and the free European market.

Simply put, Germany cannot afford to take the risk of the dissolution of the eurozone and therefore, irrespective of the actual outcome of Sunday’s election, it is almost certain that German politicians will continue to provide funds to the ailing economies of the European south. However, domestic opposition is rising and maintaining the stability of Germany and of Europe will not be an easy task.

As things stand at the moment and according to all credible opinion polls the German election results are too close to call. What this means in effect is that there is no guarantee that the current coalition will be in a position to continue governing the country and implementing its policies come Monday. If the eurosceptic party Alternative für Deutschland (AfD) does manage to exceed the 5% threshold and enter the Bundestag, then this might cause a major upset in the German political scene.

The silver lining to this cloud is that such a development might provide the impetus necessary for Merkel and her party CDU-CSU, along with the Social Democrats of the SPD to form another Grand Coalition, as they successfully did between 2005 and 2009.

However, the dangers of such a scenario cannot be overlooked, because, depending on the level of success by the AfD an upheaval in eurozone markets is a distinct possibility. It is no secret that many pressing issues regarding the future of the eurozone, and especially the growing Greek public debt, were put on hold pending the German election. Given that any further measures must be approved by the Bundestag, the new balance of power in this house and especially an AfD presence will be a cause for concern and a possible cause for instability and disruption of the normal “business as usual”. So be on the look-out for the medium and longer term effects that such a turn in German politics might have on the eurozone and the markets.

As regards more short-term effects, in case the election swings in favour of Merkel and the current coalition of CDU/CSU and the FDP remain in power then the effect of markets on Monday morning is likely to be unnoticeable.

If, on the other hand, a Grand Coalition, with the participation of the SPD is the outcome, even after the necessary negotiations are concluded, then this will have a favourable effect on the EUR/USD.

Perhaps the least desirable outcome in terms of the markets will be the electoral success of the AfD, which will most probably mean that we will witness the EUR and US futures decreasing as the markets reopen after the poll results.

Therefore, tread with caution and watch this space.