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Euro weakens in wake of German result

As shocks go, we can hardly put the result of the German Federal Election up there with ‘Trump’ and ‘Brexit’. Angela Merkel and the ruling party were returned with no real threat to the existing government and those outside of the country would deem it ‘business as usual’ in Germany moving forward.

But there were problems for Merkel and the CDU / CSU in what has been described by many political observers as a hollow victory. A reduced share of the vote and the impending presence in parliament of the far right party has been a cause for concern and one that has been reflected in the currency markets.

Euro Falls

At the close of trading on Monday September 26, 2017 – the first full trading day since the German Elections, the Euro had fallen below the $1.19 USD level – a significant drop in what is Europe’s strongest economy.

That strength has buoyed the rest of the EU and those that have adopted the single currency so it’s obvious that a period of uncertainty in Germany will have a knock on effect. It’s going to be a busy few weeks for currency traders in the aftermath of these polls but why is the result considered to have such far-reaching implications?

Key Issues

Observers believe that the dent in Merkel’s vote is largely due to the decision of the CDU / CSU to allow one million refugees into the country. Clearly that is a policy that allowed the far right AfD party to enter parliament for the first time on the back of their ‘Take back the country and the people’ message.

A win is a win to a certain extent and Merkel achieved the main aim by finishing first but she will now enter an uncertain period of negotiations as she looks to form a coalition. There is also the opportunity of Merkel stepping down as Chancellor and opening up a leadership race although news reports are relatively quiet in this respect.

What now?

It’s interesting to see how much of the situation in Germany mirrors that of the UK where Prime Minister Theresa May is also holding on to power after forming an unsatisfactory minority government. May’s position seems more tenuous as there was no need to call the early election back in June and she has had to face criticism from the press and from within her own party.

The economic situation in the UK could also become a mirror for the Germans even though the economy in Britain isn’t as strong traditionally. The pound has plummeted post Brexit and the June General Election as with talks of a leadership battle and another poll in 2018 refusing to go away, signs of recovery are somewhat distant.

Ultimately of course, there isn’t an easy answer to the question of what now but it is significant to see how Germany’s economic strength can be challenged by a political shift. The drop in the Euro’s rating against the Dollar is also significant and it will be fascinating to see if it can recover while German uncertainty remains.

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