Germany: Meet the new boss – same as the old boss

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Clients and colleagues have been asking whether the German election on 22 September will cause a renewed euro-driven swoon in risk assets.

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For sure, the euro crisis is still smouldering, and any number of events might yet fan it back into flame. Remember, the crisis can’t be settled definitively without much more fiscal, banking and political integration, and without significant liberalisation of several underperforming euro economies, including France. This is the work of a decade or so, not a few months.

That said, we doubt that the election will be such an event. Chancellor Merkel is very likely to retain office. Even if she doesn’t, it is hard to imagine an alternative administration that would take a materially more hawkish line on the single currency generally, or on (say) a further bail-out for Greece. Euro sceptics in Germany may feel disenfranchised, but in reality, of course, they are no more so than any other single-issue pressure group: elections are about party manifestos, not single issues.

“The 22 September election is unlikely to be a catalyst: whoever Germans vote for, a europhile will get in”

Moreover, if market volatility does break out on this or any other account – Italian politics being another obvious near-term candidate – the ECB stands ready if asked to activate its Outright Monetary Transactions programme and/or to improvise further.
This is not a safety net per se, because even the ECB cannot guarantee stability but, with the markets having digested so much bad news on the single-currency project these last two years, we think investors’ collective tolerance – or crisis fatigue, if you prefer – will stay elevated for a while yet.

A similar tolerance has likely developed in respect of the more serious events in the Middle East. Until the ongoing trauma has a more dramatic effect on oil prices, or more obviously threatens wider geopolitical instability, it may continue to have a limited and transient effect on global capital markets, even as its human cost rises (as have similar events in the recent past: see table in Barclays’ key macroeconomic projections.