German coalition crisis pushes euro down

The value of the euro is under pressure. This was due to the breakdown of negotiations for a German government coalition. However, political concerns in Europe's economic heart are less severe than the comments suggest.

The surprising end of the negotiations for a German government coalition hit the currency markets hard early this week. The euro fell nearly 20% against the dollar in a matter of minutes on Monday, November 1. However, that damage was made up in the course of the trading day, after which the euro fell again on Monday evening.

Some parties predict that the feint will be the prelude to much sharper price swings, while Elsevier questions whether the Jamaica coalition will become Chancellor Angela Merkel's Waterloo. However, in reality, the currency world has a lot less to worry about than you might think based on this reporting.

Nervousness not strange
It is not surprising that the breakdown of the negotiations caused some nervousness. That's partly because hardly anyone saw it coming. Before the weekend, the general expectation was that the parties would come to an agreement. The gap between the liberal pro-entrepreneurs party FDP and the Greens over mainly asylum policy did not seem unbridgeable. The news that FDP leader Christian Lindner is withdrawing from the talks came like a bolt from the blue.

Merkel's next move?
The second reason for the uncertainty is that Germany is not at all used to this political uncertainty. In the past, a stable governing coalition could always be formed fairly quickly after the Bundestag elections. It is also unclear what Merkel's next move will be.

A minority coalition is a relatively unknown phenomenon among our eastern neighbours, while by calling new elections it would emphatically question its own leadership. The Social Democrats (SPD), with whom Merkel's CDU still forms a government, indicated that they are reluctant to join the talks.

The Netherlands as an example
Although the situation makes quite an impression on the followers of German politics, many Dutch people will shrug their shoulders upon hearing the news. The exact same thing happened here a few months ago. After several weeks of negotiations, GroenLinks withdrew from the negotiations.

At the time, the Netherlands also seemed to be heading for a minority coalition, or for new elections. However, at the end of October the new Rutte III cabinet was still on the platform. It is therefore far too early to erase the possibility that the FDP will rejoin the negotiations. Perhaps the SPD will still have a say in forming a coalition.

Merkel sidetracked?
Even if there are new elections, there is little chance that Merkel's CDU/CSU will be sidelined. In September, the party received a third of all votes. This made the party a lot bigger than the SPD, which was the second largest with 20,9% of the vote.

Although the headlines suggest otherwise, it is difficult to imagine a scenario in which Merkel, unknowingly, ends up sidetracked. But for the time being, the German coalition crisis is very much like a storm in a teacup. The price pressure is therefore of a temporary nature; at least until traders start to worry about the Italian elections scheduled for next spring.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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