Germany’s new coalition could come with risks for Europe and the Brexit process.
Germany’s two major parties, Chancellor Angela Merkel’s center-right Christian Democrats and Martin Schultz’s center-left Social Democrats, are seeing light at the end of the tunnel by reaching an agreement for a proposed coalition that would end months of uncertainty.
Despite the fact the Social Democrats still have the option to vote on the final plan, major positions in the new administration are being filled, including replacing the head of the Finance Ministry. Wolfgang Schäuble, Germany’s conservative finance minister, is set to be replaced by the more moderate Olaf Scholz, a Social Democrat, and analysts are studying what this could mean for the euro.
The coalition deal would give Social Democrats control of seven Cabinet posts. The new finance minister is expected to push the government into taking more pro-European Union positions that France, Italy, Spain and Greece have long been demanding, and could get Germany to relax some of its hard-line positions against struggling EU countries such as Greece, Italy, Spain, Portugal and France, analysts said.
Even France has high hopes for Olaf Scholz expecting a significant loosening of German fiscal policy. However disappointment could roll earlier than previously thought as Scholz has always shown a limited tolerance for big-spending suggestions from his party’s left-wingers.
While Scholz, a former Hamburg mayor, is called business-friendly and moderate by local media, Schäuble is known for his outspoken criticism of the European Central Bank’s quantitative-easing program and his fiscal conservatism. In October, Schäuble warned that the loose monetary policy of the European Central Bank and its peers had created too much debt globally and could cause the next global financial crisis, for example.
Scholz could be a much different finance minister, potentially marking a shift for the Eurozone, European government bonds and the common currency.
As analysts note, Scholz could lead an expansionary German fiscal policy and therefore faster growth — and higher interest rates — throughout Europe. This would further support the euro, which already has strengthened 2.1% against the US Dollar in 2018, as higher interest rates would push the shared currency up.
At the same time, the European economy is set to expand without his help, with the ECB slowly but surely moving towards normalizing monetary policy and analysts are expecting another good year for European assets. This could overshadow any potential euro-positive effects Scholz might bring about in the near term.
Social Democrats, whose party has seen a surge in applications throughout the negotiation process with the Christian Democrats, still have to vote on the coalition agreement with Merkel’s party, and a no vote would likely result in new elections.
Results are due on March 4, which is also Election Day in Italy.
Germany’s Next Finance Minister Challenges Euro
Market Trends - 21/02/2018