A New Germany – will it change much?

Blain’s Morning Porridge, 30 November 2021, St Andrews Day – A New Germany – will it change much?

“My name is Hoover, but my friends all call me vacuum cleaner..”

(Apologies for the German Joke..  I first heard it in 1983..)

This morning – The new Germany looks almost exciting! What will a post-Merkel Germany look like? Will green and business interests align under the new fraffic-light government? How will the relationship with Brussels and the ECB shape up? “Interesting” times ahead.

Continuing my tradition of writing about things I have little practical experience of, but which are likely to be highly market significant – this morning let’s cover potentially the most boringly important question in Europe: German Politics.

It’s been a week since the “breakthrough” coalition agreement between the “traffic light” of the centre-leftist Social Democrats, the Greens and the business orientated Free Democrats was announced. The new Chancellor will be ex-finance minister Olaf Scholz, backed by FDP leader Christian Lindner taking the critically important finance seat, while Green leader Annalena Baerbock gets the Foreign Ministry.

Yesterday, the German inflation number came in at 5.2%, with the Bundesbank warning November’s number will be higher – 6% or more. No one in BUBA expects “transitory” inflation anymore – they expect 3% plus for the near term. The ECB continues to witter on about getting back to a 2% target next year. These numbers will have a significant effect on the mindset of German voters – and by extension what worries Germany should worry Europe.

It feels like the perception gap between Europe and Germany is widening. And that’s an issue – few currency unions have historically lasted more than a couple of decades before internal pressures undo them. The Euro has done rather well, going from strength to strength and reinforcing its influence and depth across the Eurozone. That could change if Germany decides to take a different path – and this new Government may be the start of something different from the Merkel era.

Anglo-Saxons (and Celts like myself) tend to be arrogantly dismissive and belittling of German politics, and make the mistake of considering from same jaundiced perspective we look at own blighted domestic political embarrassments. Big Mistake – German Politics matter. More to the point… they will have consequences.

How much a new government, a new post-Merkel start and a new Green-leaning administration will change Germany and Europe is unclear, but it will be significant. 15 years of Merkel is over. How Scholz finds his place beside Macron of France and Draghi of Italy will be fascinating. Anglo-Saxon commentators predicting a rift with Europe will be way-off the mark, but the relationship could subtly change.

The big issue for Europe is – more or less Germany?

But first; since the agreement we’ve seen two reactions in the gab-o-sphere that passes for US/UK political analysis: that the coalition is essentially unworkable (nonsense), and the bulk of the “critical” focus has almost entirely been on “woke” social policy announcements (missing the important stuff).

Knock both negatives on the head:

• Germany coalitions are effective because they are agreed with contextual legalities, and voters expect German politicians to make them work. No matter how diametrically opposed the policies of the FDP and Greens appear to be – give and take is built into the agreement. Collisions occur but politicians are forced to compromise and trade on policy. It works. (Unlike, say a UK coalition which inevitably ends in the tragic death of the Liberal Party.. again, and again, and again.) For this coalition the FDP has accepted Coal power stations will be shuttered early by 2030, while the Greens have given up plans for an Autobahn speed limit.
• The second aspect is social policy where 99% of the commentary has been outright hostility about LGBTQ+ rights and immigration. The reality is the noise around these two divisive topics is largely noise, but illustrates just how polarized society is becoming, or how vocal small minorities have become. Giving full rights to all citizens regardless of sexual preference or identification should not be a big deal – it isn’t.
• Immigration is more difficult as Europe’s vocal right wing populist parties are coalescing against it – inflaming traditional fear of outsiders, and presenting all Muslims as a clear and present danger. The reality for Germany is that 400,000 immigrants per annum will prove a massive long-term positive for the economy, reversing and ameliorating the effects of demographic decline. (If you want to see the positive power of immigration in action, understand the history of the UK where successive waves of migration have transformed and grown the economy for centuries, and the US which is a nation founded on immigration. Europe’s pitchfork and torches wielding right wing will never accept that.)

The push of the new Traffic Light Government is far wider than just LBGTQ rights and Immigration. The aim is to modernise Germany. Good luck to them. It might even work!

The new government could align Green and Business interests together – because politicians on both sides understand that’s what people want, and will likely deliver growth! Listening to German chums describe the possibility of a new era, it does feel something has been lifted that was holding back the economy. Addressing climate change with new programmes which will also boost the competitiveness of the economy.. What’s the problem? Where’s the conflict? None.  The Green’s hostility to nuclear power is a block, but it forces the FDP to propose other solutions – at some point there will be agreement. The issues around the Nord-2 Gas Pipeline, and Putin’s machinations will be a challenge for a Green finance ministry – everyone gets it.

Ideas like boosting rail haulage and electric transport infrastructure, granting citizenship to the large number of Turkish gastarbeiters, and public housing construction are all positive. The 173 page Coalition Agreement is long on comments on removing red-tape and opening the economy to renewables. Yet, plans to legalise and regulate cannabis has secured far more column inches and headlines in the international media.

The economic issues facing Germany fall to the critical coalition job at the finance ministry.  The FDP’s man in the chair is Christian Linder, a monetary hawk who has already made clear he will oppose further Eurozone fiscal integration. That doesn’t mean he’ll choose a direct confrontation with ECB President Christine Lagarde.

He doesn’t need to. The German media is doing the job for him. In recent weeks, following the resignation of Bundesbank president and noted hawk Jens Weidmann, the media has gone on the attack. They are venting at Lagarde (by definition the ECB) and her easy and relaxed attitude to inflation. They do so by focusing on Germany’s high propensity to save (savers are hit hardest by inflation), and the historical fear of inflation in Germany. Bild has nicknamed the ECB head as “Luxury Lagarde”, questioning whether its right for a central banker to be wearing €8k Chanel outfits.

Moreover, the media is increasingly aware and critical of what the ECB achieved over the pandemic – effective fiscal and monetary control over Europe.  Lagarde is increasingly portrayed as a political apparatchik, appointed to secure Brussel’s goal of achieving financial sovereignty over the Eurozone. That’s largely been achieved through the pandemic with the ECB’s Social Recovery Bond programme – which allows Brussels to issue mutualised Eurozone debt and distribute it (a form of regional policy) to “deserving” EU members. Already Poland has been threatened with exclusion from funding unless it starts to toe the line on EU judicial sovereignty.

So where does this sea-change in German politics get significant for markets?

I predict the new Germany pushing back from closer European unification, and a return to a simpler Europe where trade is the most important issue – that’ s potentially good news for Brexit Britain. The German finance ministry is unlikely to support closer fiscal integration and will likely call for an end of creeping mutualisation programmes. The appointment of the next Bundesbank head will be a clear indication of where Germany is headed in that respect.

However, a second issue is the way Germany does politics. It might look dull and fraught with compromise to Anglo Saxon eyes, but its pragmatic. Germany may prove more than willing to trade with Brussels in terms of some give and take between Brussel’s fiscal objectives, and its foreign policy objectives in terms of Europe re China and Russia.

Watch that space. The key message re German politics – it ain’t what we think it is..

Five Things to Read This Morning

BBerg – Powell Says Omicron Adds Economic Risks, Inflation Uncertainty

FT – Pension funds seek returns in private assets as public market outlook dims

WSJ – Turkey’s Lira Crisis Exposes Reliance on Imported Energy

Guardian – A new German Era Dawns, but collisions lie in wait for coalition

FT – Moderna chief predicts existing vaccines will struggle with Omicron

Out of time, and back to the day job, after taking puppy for a walk first!

Bill Blain

Shard Capital