German coalition crisis causes euro to drop

The value of the euro is under pressure because negotiations about a German government coalition have collapsed. However, the political worries in the economic heart of Europe are less serious than you might suspect from certain commentaries.

The surprising end of the negotiation about a German government coalition hit currency markets hard this week. Early on Monday morning, the euro dropped by nearly one per cent within a few minutes compared to the dollar. That loss was recovered again during the trading day, after which the euro dropped again on Monday evening. Some parties predict that this could be the start of much more serious exchange rate fluctuations, while Elsevier wonders if the Jamaica coalition will become Chancellor Angela Merkelís Waterloo. In reality, however, the currency world doesnít have to worry as much as you would think on the basis of this news.

Tension
It was no surprise that the collapse of the coalition negotiations caused tensions. That is partially because no one saw it coming. Before the weekend, the general consensus was that parties would reach an agreement. The divide between the  liberal, pro-business FDP and the Greens about the asylum policy in particular didnít seem unbridgeable. The news that FDP leader Christian Lindner withdrew from negotiations therefore came like a bolt from the blue.

Next step
The second reason for the current uncertainty is that Germany isnít used to this kind of political uncertainty at all. In the recent past, a stable government coalition was formed fairly quickly after Bundestag elections. Moreover, itís unclear what Merkelís next step will be. Our neighbours to the east are unfamiliar with minority coalitions, while new elections would put her leadership up for discussion more prominently. The social democrats (SDP), who are still part of Merkelís government with the CDU, said theyíre not interested in joining the negotiations. 

The Netherlands as an example
Although the current situation made quite an impression on followers of German politics, many Dutch people will shrug at the news. A few months ago, the same thing happened here, after all. After a few weeks of negotiating, GroenLinks (the Dutch Green party) withdrew from negotiations. At the time, the Netherlands also appeared to be heading for a minority coalition or new elections. Yet Rutte III was presented to the Dutch in October. Itís therefore too early to dismiss the possibility of FDP rejoining the negotiations, or the SDP talking about forming a coalition.

Sidetrack
Even if there are new elections, the chances are small that Merkelís CDU/CSU will be left out. In September, the party got a third of all votes. Because of that, the CDU/CSU was much larger than the SPD, which was the second-largest with 20.9 per cent of votes. Although headlines might make you think differently, itís difficult to come up with a scenario in which Merkel is sidetracked without her input. For now, the German coalition crisis is much like a tempest in a teapot. The exchange rate pressure on the euro is only temporary. At least until traders start worrying about Italian elections planned for next spring.

Laurens Maartens (laurens.maartens@nbwm.nl) is a currency expert with the Dutch Payment and Exchange Company (www.nbwm.nl). He started his career with Swiss bank UBS in 1998. He has been employed by several parties, both nationally and internationally, since then. He provides commentary for current currency developments in newspapers, on websites and on the radio. In addition, he gives lectures and trains entrepreneurs in the field of currency management. He urges participants to choose simple and inexpensive currency products. This column reflects his personal opinion. This information is not intended to constitute professional investment advice nor is it meant as a recommendation to make certain investments through the Dutch Payment and Exchange Company plc.

Publication date: 11/22/2017


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