When talks to form the next ruling coalition in Germany collapsed early in November it was interpreted in a range of different ways. Much of the focus, of course, was on the future for Germany and on the prospect of facing that future without a ruling figure – Angela Merkel – who many had assumed would simply be in place forever. Beyond this there was speculation on the impact events would have on the further development of the EU and, in the UK at least, much talk about the effect a delay in forming a government would have on the ongoing Brexit negotiations.
Initially, the sense that Germany, which sits at the heart of the European project, might not be as stable in the future as it has been for many years, led to a drop in the Euro around the currency markets. In immediate response to the collapse of talks, it dropped 0.5% against the US dollar and 0.43% against the pound. The talks themselves took place between the Christian Democratic Union (CDU), the Christian Social Union (CSU), the pro-business FDP, and collapsed when the FDP walked out of talks, with the disagreement centring on immigration policy.
Many of those pushing for a harder Brexit, and for refusing to make an offer on the ‘divorce settlement’ prior to trade talks starting, seized upon the collapse of the coalition talks as an opportunity to push their agenda. Similarly, the slip in the value of the Euro led some traders to predict a longer term decline, and thus a ‘correction’ to the post-Brexit weakness of the pound, but events in recent days have demonstrated that the underlying strength of the German economy is such that the impact of the failed coalition talks is likely to be fleeting.
The German Business Sentiment IFP Survey was released on Friday 24th November and showed a positive response on two key matrix – ‘Expectations’ and the ‘Business Climate Index.’ Allied to this is the fact that ongoing talks seem to be moving toward Merkel forming a ‘grand coalition’ with the leader of the SDP Martin Schulz. If this does happen, then the avowedly pro-European Merkel would have a sizeable majority in the country and the general trend toward greater integration would continue.
In many ways, the response to the prospect of Merkel losing power betrayed something of a misunderstanding of the workings of the European Union. Any hope that the Brexit vote would be the first domino to fall in a wider dismantling of the European project seems to have stalled, with the voters in France and the Netherlands rejecting populist anti-European candidates.
The concept that the Brexit negotiations would hinge upon the German government – prompted by the motor industry – pressuring the EU to make concessions foundered on the fact that the unity of the EU as a whole is seen as politically far more important than any desire to avoid a short-term trade or economic setback. Taken together, this all means that any future projection of the forex markets should assumes stability in Germany and thus at the centre of the EU, and a Brexit process which takes whatever direction it finally takes irrespective of the internal political machinations of the German government.