Political instability in Germany

The loss was not small; the CDU had to accept a loss of 11,3% and for the SPD the loss amounted to 10,9%. There is a good chance that this will have political consequences in Germany in the near future. In addition, Angela Merkel decided to no longer run for office as leader of the CDU and to quit after her current term as Chancellor.

Apart from the question of whether that is not the case additional uncertainty (who should believe the market if Merkel and her successors are not on the same page), it is also questionable whether Merkel's wish (to complete her term as head of government) is not Wunsch Denken. 

Unwanted marriage
At the federal level, the CDU/CSU governs with the SPD and that is a marriage that many members did not want from day 1. Now that the SPD has been punished for the second time, the already great dissatisfaction with the government's participation in that party is increasing further. Within the SPD, the voice of pulling the plug on the coalition is becoming louder. Members believe that the party is being punished for Merkel's policies and unpopularity.

The SPD indicated in 2017 that it would include a kind of review about the party's participation halfway through the process. He finds it in 2019 place. What is ominous in that respect is that the SPD recently gave Merkel an ultimatum: either her government must show clear results in the near future or the party will end the coalition.

If the SPD were to quit, we would probably have new elections next year. Since the end of World War II, it has taken an average of 43 days for a new government to be formed. In 2017, however, the parties only reached an agreement after 171 days. It is easy to imagine that forming a new government in mid-term national elections would again take a long time.

Premature death
Would the government of Merkel were indeed killed prematurely, then political instability would be complete; and this in the country that has been the beacon of economic and political stability in the eurozone. This would come into play in 2019, among other things: the year in which not only a new head of the ECB will be elected, but also the new President of the European Commission (EC) and the new European Commissioner for monetary and economic affairs.

The consequences can far-reaching are. Germany appears to have set its sights on the post of the new president of the EC. The question is whether a weakened Germany, with an outgoing government, will get its way. There is a good chance that it will have little influence on the filling of other important posts, both within the EC and outside it; consider the election of Mario Draghi's successor as president of the European Central Bank.

Value of the euro
Political instability is more likely to be negative than positive for the value of the euro, but also for German long-term interest rates. These can sometimes increase more rapidly. On the one hand because of this instability, but also because there is an increasing chance that the country will pay more directly for keeping weak euro countries, such as Italy, afloat. 

In 2019, important decisions are also likely to be made about the future of the euro. A weakened Germany may have less say, which could result in greater financial solidarity in the monetary union. Such an outcome would reduce the attractiveness of German government bonds, resulting in additional upward pressure on long-term interest rates.

If Germany becomes politically unstable, a euro-dollar exchange rate of 1,10 is more likely than 1,25. Something that could boost economic growth, but also inflation in the eurozone and force the ECB to raise the official interest rate sooner or faster.