Angela Merkel's CDU/CSU and the SPD are finally out: these two parties will continue to form the German government in the coming years. Viewed in this way, the policy of recent years appears to be continuing. However, there is one but…
What we are witnessing is a significant change that could be of great importance for the euro and the eurozone. Immediately after the German elections, the SPD indicated that it would be in the opposition. The fact that the party did start talking to Merkel came (to put it briefly) after pleas from the latter. The SPD simply needed this to continue governing. The only other alternative was to call new elections.
This means that the SPD was able to make quite a few demands and that quite a few of those demands were met. One of them is that the new Minister of Finance had to be an SPD member. In addition, the parties have already secured the posts of Minister of Foreign Affairs and Labor. The above requirements also affect the euro and the eurozone.
Pro-euro party
The SPD is a very pro-euro party. While the CDU/CSU is not in favor of a Eurobond, joint government bonds, or a European Ministry of Finance, the SPD is in favor of this. In recent years, CDU/CSU supplied the Minister of Finance, Wolfgang Schäuble. He emphasized cuts and reforms elsewhere in the monetary union, but he rejected more solidarity (for example through a Eurobond).
As mentioned, the SPD has a different position. It is significant that the 'Europe' chapter in the agreement is discussed first. The German voice at meetings about the eurozone could become very different in the coming years. At the beginning of the agreement we read that Germany is prepared to show more solidarity with the other euro countries and that the country is prepared to invest more money in the euro zone. And that is almost impossible to remain without consequences.
Consequences of policy?
What consequences should we think about? To begin with, the plans for strengthening and deepening the eurozone (which will be discussed later this year) will have a greater chance of success. Germany will be less willing to water down the proposals made by France and Italy. In other words: the monetary union in Europe can therefore become a stronger and more robust union.
The above in combination with the fact that Germany will more often be prepared to be solitary with the other euro countries (read: open its wallets), means that the flare-up of a new euro crisis becomes less likely. The question: 'will the euro still exist in x years?' becomes less relevant for investors.
It reduces the chance of yields spiraling out of control in the weaker euro countries. After all, investors know that the safety net is stronger, partly due to the German willingness to come to the rescue if necessary. Note that this new situation may actually lead to some additional upward pressure on German long-term interest rates, as it is possible that the total costs for Germany will rise.
Strengthen trust
The above could strengthen confidence in the euro and thus increase the chance of a further increase in the euro-dollar exchange rate. This is certainly the case if developments occur in the United States that are negative for the dollar. A new political impasse is conceivable (parliamentary elections will be held in November).
Another area where changes could occur concerns the European Central Bank. This year the bank will have a new vice president and a new chief economist; The bank will have a new president next year. This new German attitude vis-à-vis the eurozone may also be reflected in these appointments, something which in turn may influence the bank's price for the coming quarters and/or years.
Of course, here too we will have to wait and see how things will turn out with the new German Minister of Finance. But given that the likelihood of changes is high, with both short- and long-term consequences, it is useful to keep all this in mind.