Threadneedle: Bundestagswahl festigt europäische Sparpolitik

“The German election results were broadly in-line with what had been projected by the polls, although it is perhaps a surprise that the FDP did not rally enough votes to meet the 5% threshold. It is most likely that a grand coalition will now be formed between the CDU and SPD, a scenario that markets are evidently relatively comfortable with, although a period of negotiation may ensue before any final agreement is reached. The two parties appear to be relatively well-aligned regarding European policy, and we won’t have to wait too long for confirmation of this point, with impending reviews of the Greek and Portuguese bailouts likely requiring additional funds.

The strength of Merkel’s victory may galvanise a  slightly harder stance on fiscal consolidation than would otherwise have been the case, and we will be interested to see over the coming months whether the new government is vocal about the lack of progress on fiscal consolidation in France, Italy and Spain. German politicians have been relatively passive regarding the widespread rejection of austerity across the region this year, no doubt preferring to focus on domestic issues ahead of the election. However, as debt/GDP projections move ever higher, we see a risk that this comes back onto the agenda. Sovereign bond investors are not focussed on these metrics right now, but the Germans along with the European Commission will be keen for those nations with deficit worries not to become complacent in the current favourable market environment.”