Germany election / Ukraine

Quick thoughts on two pressing political issues: yesterday’s federal election in Germany, and the President Trump/Ukraine situation.

• The results of the German election are broadly in line with polls: the conservative CDU/CSU alliance is confirmed as the largest single party, and will take the lead in forming a coalition, but with the nationalist AfD taking second place and becoming a major presence in the Bundestag. It is unclear what form the new governing coalition will take, but with the established parties (including the CDU/CSU) pledging to keeping the 'firewall', the AfD are unlikely to take part, leaving Germany committed to the euro and EU.
• Germany seems likely to be in political limbo for a while longer. It will be difficult for the CDU/CSU to negotiate a governing coalition without the AfD – particularly if the objective is to achieve the two-thirds parliamentary majority needed to change the constitution and deliver a significant loosening of the debt brake, the limit on government borrowing. The support of the Green and/or Left party may be needed alongside that of the SPD.
• For now, though, the likely impact of Germany’s political difficulties on capital markets remains small. Its European commitment is intact, its monetary policy is driven by the ECB, and a significant increase in the budget deficit is still some way off. If anything, the euro is slightly firmer this morning.
• It’s hard to know whether President Trump and Musk’s comments last week on Ukraine were intended seriously, or as part of the duo’s ongoing sensation-seeking. Markets – and, we hope, European politicians – are perhaps better judges of substance than the media, which are compelled to report and 'analyse' every twist and turn of Trump’s rhetoric (as we note in the Market Perspective published last week).
• For now, the main point (it seems to us) is that European defence budgets are indeed going to rise – but we thought we knew this already. In the meantime, a settlement which excluded Ukraine might be seen as unsustainable, and have little lasting impact on risk appetite and/or energy costs.

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