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The Guardian - UK
The Guardian - UK
Politics
Graeme Wearden

Markets edgy as German president demands responsibility after coalition talks collapse – as it happened

German Chancellor Angela Merkel in Berlin this morning.
German Chancellor Angela Merkel in Berlin this morning. Photograph: John Macdougall/AFP/Getty Images

A late PS.... Could Germany be heading for new elections?

Philip Oltermann reports from Berlin:

Angela Merkel has indicated that she would rather have fresh elections than try to rule in a minority government as the collapse of German coalition talks posed the most serious threat to her power since she became chancellor more than a decade ago.

Merkel, who has headed three coalitions since 2005, said she was “very sceptical” about ruling in a minority government and suggested she would stand again as a candidate if elections were called in the new year, telling public broadcaster ARD she was “a woman who has responsibility and is prepared to take responsibility in the future”.

More here:

Summary: Markets on edge over German deadlock

Time for a recap.

European investors are bracing for fresh upheaval after Germany’s coalition talks collapsed overnight.

With Angela Merkel’s position as chancellor looking less secure, analyst are predicting further volatility – and possibly losses in the weeks ahead.

Right now, the euro has lost 0.3% against the US dollar, to $1.176. It has also lost ground against the pound, which is up 0.6% at €1.127.

The markets were jittery after Germany’s Free Democrats walked out of ‘Jamaica coalition talks’ with Merkel’s CDU/CSU bloc, and the Green party. As things stand, there seem to be three outcomes

  • 1) Merkel tries to govern in a minority government, perhaps with support from the centre-left Social Democrats
  • 2) Fresh elections are held, likely early next year
  • 3) The FDP return to negotiations.

President Steinmeier has urged all sides to act responsibly, saying they have a responsibility to do their best to ensure Germany has a stable government. The ball is now in Steinmeier’s court; he must recommend a candidate to be chancellor, which MPs in the Bundestag will vote on. Here’s what might happen next.

After suffering early losses, European stock markets are are little higher this afternoon.

European stock markets this afternoon
European stock markets this afternoon Photograph: Sky News

The possibility that Angela Merkel might not govern as chancellor for several more years has caused some head-scratching in the City. It could make it harder for her to offer Brexit concessions to the UK, or to support French president Emmanuel Macron’s push for European reforms.

Wolfgang Bauer, fixed income fund manager at M&G Investments, says the outcome of the German crisis will drive markets in the weeks ahead.

If the grand coalition was to be renegotiated and went ahead, this would mean political stability in Germany and support for risk assets like equities and corporate bonds. I expect that the SPD would be able to push through more of their agenda and this might mean further steps towards European integration, reaching out to Macron.

If however negotiations between CDU/CSU and SPD fail and we are heading towards a minority government or even snap elections, I would expect to see market volatility increase due to rising political uncertainty in Europe’s economic powerhouse.

It would be less likely that any major European integration projects would be pushed forward for the foreseeable future. It is important to note that the tail risk remains and currently it does not seem to be priced in.”

Video: German president speaking today

A clip of Frank-Walter Steinmeier speaking this lunchtime, complete with subtitles for English readers:

Germany: What happens next

Teneo Intelligence have kindly sent over an explanation of how Germany’s political system will proceed, following the breakdown of the ‘Jamaica coalition talks’ last night.

A Bundestag vote is the next step

As a lesson from the Weimar days, the Bundestag cannot dissolve itself. Neither can Merkel unilaterally provoke early elections via a confidence question. After all, the newly elected Bundestag has never expressed its confidence in Merkel in the first place; she currently serves merely as caretaker.

Therefore, the next step is necessarily the attempt to elect a chancellor in the Bundestag. There is no time limit, but Steinmeier must eventually propose to MPs a candidate he deems best placed to win support in the Bundestag – this remains likely to be Merkel, lead candidate of the strongest parliamentary group. Without any coalition agreement in place, she will not receive the required support of an absolute majority of all MPs (355 out of 709) in the first round of voting.

14 day deadline, caretaker government, and Europe

In consequence, a 14-day deadline kicks in during which this vote could (theoretically) be repeated multiple times. This, however, is likely only if, for instance, the SPD were to change its mind and opt for another grand coalition.

In the meantime, Merkel and her grand coalition cabinet continue to serve as caretakers. Hopes in the UK for a political deal with Berlin on Brexit were unrealistic before but have now become even less likely. The EU’s negotiation guidelines, including the need to pay a sufficient amount of money in the run-up to the December European Council, are still the basis for any deal, now more than ever. Eurozone build-out jointly with France remains a task for the next government, but conversations will remain on ice until the deadlock in Berlin has been broken.

How to dissolve parliament and hold snap elections

Absent such developments, however, another round of voting must be held within 14 days of the first round. This time, a plurality of votes is sufficient for a candidate to be elected chancellor (i.e., the candidate who receives the largest number of votes is elected). It is then up to the federal president to decide, within seven days, whether to appoint the elected candidate on the basis of this plurality vote. The result would be a minority government. The alternative option for the president is to dissolve the Bundestag and call early elections. These would have to be held within 60 days of the dissolution of parliament.

As a result, mid-February would be the earliest possible date for snap polls. The exact timeframe, however, depends on how quickly Steinmeier proceeds in the coming days towards proposing a candidate for chancellor to the Bundestag.

Here’s a photo of German Chancellor Angela Merkel meeting with President Frank-Walter Steinmeier today.

German Chancellor Angela Merkel meeting with President Frank-Walter Steinmeier today.

ECB President Draghi in Brussels today.
ECB President Draghi in Brussels today. Photograph: Yves Herman/Reuters

Over in Brussels, European Central Bank president Mario Draghi is testifying to MEPs.

Draghi hasn’t mentioned the situation in Germany in his opening statement. Instead, he argues that Europe’s economic recovery is solid and broad-based, but also warns the euro area must be strengthened to help it deal with upcoming risks.

As Draghi puts it:

The EU Treaties gave the ECB the primary objective of maintaining price stability in the euro area as a whole. This is the best contribution we can make to the welfare of our fellow citizens.

Ensuring price stability is a precondition for the euro area economy to achieve a balanced growth path that can be sustained in the long run. But this is not the only condition.

Achieving a balanced growth path also requires to strengthen the euro area ability to deal with risks, whenever they will materialise. The current economic outlook provides a unique opportunity to reduce the likelihood of severe shocks by strengthening the economic structures of Member States, with policy actions both on the fiscal and structural side.

At the same time, boosting the resilience of the Economic and Monetary Union (EMU) implies also reinforcing our common institutional set-up so as to prevent and manage shocks.

The key part of Frank-Walter Steinmeier’s statement came when he urged all political parties to consider helping to form a new government.

The German president said:

“All political parties elected to the German parliament have an obligation to the common interest to serve our country.

“I expect from all a readiness to talk to make agreeing a government possible in the near future.”

German President Frank-Walter Steinmeier giving his statement on the coalition deadlock
German President Frank-Walter Steinmeier giving his statement on the coalition deadlock Photograph: Axel Schmidt/Reuters

President Steinmeier: All parties must help find a solution

Newsflash: German president Frank-Walter Steinmeier is delivering a statement in Berlin now, following his meeting with Angela Merkel.

Steinmeier says that Germany faces an unprecedented situation, following the breakdown in coalition talks between the CDU/CSU, the FDP and the Greens.

He says he expects all parties to be prepared to help find a solution. He’ll be speaking to the leaders of Germany’s political parties, and the heads of other institutions, to see if a government can be formed.

Steinmeier also reminds Germany that the world is watching, saying it is clear that European nations would be concerned if the region’s largest economy can’t form a stable government.

And that’s it - he doesn’t take any questions.

Updated

Germany’s Social Democrats, who came second in September’s election, are sticking to their policy of not joining a grand coalition with Angela Merkel.

That’s according to a party document seen by Reuters, which reports:

“Given the results of the Sept. 24 election, we are not available for entry into a grand coalition,” read a SPD paper due to be discussed by party leaders that was obtained by Reuters.

“We are not afraid of new elections.”

European stock markets have now recovered their earlier losses as traders await news from the Merkel-Steinmeier talks.

Political analyst Nina Schick suggests the political uncertainty could last for months, though, meaning traders will remain nervous.

Here’s our latest report from Berlin.

Angela Merkel’s political difficulties could be bad news for the UK over the Brexit talks.

Mihir Kapadia, CEO of Sun Global Investments, reckons it will be hard for the chancellor to give Britain any concessions, as she’ll have to take a ‘pragmatic’ approach.

She will be preoccupied with domestic issues and unable to assume a leadership role in the EU.

She was expected to return to the European fray as the leader of Germany and push for a faster more pragmatic approach which would be more favourable to the UK. However, she will now be mired in domestic political difficulties and will not have the time or the perceived authority to take a lead in Europe. The vacuum will be filled in part by a more pro-EU stance by Mr Macron.

Analysts at Citigroup say the euro is being propped up by several factors - including the lack of clarity over German politics right now.

Over in Berlin, Angela Merkel arriving for a meeting with German President Frank-Walter Steinmeier at Bellevue Palace, his official residency.

Merkel will brief Steinmeier about the state of the coalition talks (nicht sehr gut!). Steinmeier is then expected to give a statement around 2.30pm local time (1.30pm GMT)

German Chancellor Angela Merkel arrives in her car at the presidential residence Bellevue Castle in Berlin to meet the German Presiden.
Merkel arriving at Bellevue earlier today Photograph: John Macdougall/AFP/Getty Images
German Chancellor Angela Merkel pledged early Monday to maintain stability after the Free Democratic Party pulled out of talks on forming a new government with her conservative bloc and the left-leaning Greens.

Euro volatility has risen this morning, suggesting that traders are more nervous about Europe’s prospects.

But...we’re nowhere near the levels seen in April, when Emmanuel Macron and Marine Le Pen were battling for the French presidency, as this chart shows:

Euro volatility

Kathleen Brooks of City Index suggests the markets may be underestimating the risks from Germany.

Volatility spiked ahead of the French election, which turned out to be a boon for markets as Emmanuel Macron was easily elected President of France. The market got the level of risk wrong back in April, and were overly worried, could they be wrong this time and be overly complacent?

How this saga plays out in the coming days will be crucial for European traders. It’s not beyond the realm of possibility that Germany could end up being the biggest political hot potato for the Eurozone this year.

A quick reminder of the result of September’s election shows why Angela Merkel is in a bind.

German election results

Having only won 246 out of the 706 seats in the Bundestag, the CDU/CSU needs coalition partners to form a stable government.

However, the maths is tricky, as the SPD isn’t willing to join another grand coalition.

That leaves four smaller parties; but ideological disagreements mean a formal deal with either the left-wing Die Linke or the far-right AfD isn’t feasible.

So a deal with the Greens and the the FDP was the only option.

Christian Odendahl of the Centre for European Reform reckons the SPD could help prop up a minority administration.

Here’s a chart of the euro’s sharp moves against the US dollar this morning:

However, the euro is still down 0.5% against the pound, at €1.125.

Euro recovers on minority government hopes

A flurry of headlines from Germany are helping the euro to claw back some of its earlier losses.

The Free Democrats have apparently signalled that they could support a minority government made up of the CDU-CSU bloc and the Green party.

FDP parliamentary director Marco Buschmann told the Bild newspaper that:

“If there are good initiatives, then we are available.”

The prospect of Angela Merkel holding onto power seems to be reassuring investors, even though nothing is clear at this stage.

Dutch foreign minister Halbe Zijlstra has warned that the collapse of German coalition talks last night is ‘bad news’ for Europe.

Zijlstra told reporters in Brussels that:

“Germany is a very influential country within the EU so if they don’t have a government and therefore don’t have a mandate it’ll be very hard for them to take positions.”

(thanks to Reuters for the quote)

Peter Thal Larsen, European editor at Breakingviews, sums up the situation:

Political economics professor Henrik Enderlein says Angela Merkel has been “seriously weakened”, with no easy way forward.

German Chancellor Angela Merkel last night.
German Chancellor Angela Merkel last night. Photograph: Sean Gallup/Getty Images

The possibility that Angela Merkel could be forced out of the German Chancellery will worry the City, says Rebecca O’Keeffe, head of investing at interactive investor.

“European equity markets have picked up where they left off last week, heading lower after the FDP walked out of German coalition talks. Angela Merkel has been the glue that has held the European Union together for the past 12 years, a stable force in turbulent times.

Chancellor Merkel is also one of the few European politicians who has demonstrated she may be prepared to compromise with Britain, rather than run the risk that Prime Minister May is replaced by a hardline Brexiteer. With almost unsurpassed political experience, markets will want Germany to find a quick solution, preferably one that leaves Mrs Merkel in situ.

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Ulrich Speck, senior research fellow of the Elcano Royal Institute think tank, says the collapse of the Jamaica coalition talks could be a major moment in German politics, and beyond.

The pound is gaining ground against the euro this morning, up 0.25% at €1.1235.

Angela Merkel will meet with Germany’s president, Frank-Walter Steinmeier, later today to discuss the situation.

Steinmeier is a leading figure in the left-wing Social Democrat party - who came second in September’s election but refused to enter another Grand Coalition.

Marc Ostwald of ADM Investor Services suspects that a minority government made up of Merkel’s CDU/CSU and the Green party might have decent survival prospects, as the SPD could support much of its legislative programme.

He adds:

As a point of historical note, there is no precedent for fresh general elections so quickly after the previous one. I would not want to second guess this situation, but with Steinmeier being president, and the risk that any or all of the CDU, SPD and FDP take a hammering if fresh elections are held, it might be the compromise outcome.

Germany’s DAX stock index has fallen by half a percent at the start of trading in Frankfurt.

Postal operator Deutsche Post, financial group Deutsche Bank and industrial giant Thyssenkrupp are leading the fallers.

But...energy provider RWE have jumped by almost 4%. That’s because German’s Green party would have pushed for coal-fired power plants to be shut down had they joined a coalition.

Other European markets have also dipped into the red.

The major European stock markets in early trading
The major European stock markets in early trading Photograph: Thomson Reuters

Lukman Otunuga, research analyst at FXTM, fears that Angela Merkel’s failure to form a new government could drive markets lower.

With this bombshell development heightening concerns over political instability in Europe’s largest economy and sparking speculation of fresh elections, the Euro may be in store for further punishment.

Although Europe’s encouraging macro fundamentals may offer some background support to the Euro long term, political risk has the ability to trigger further selloffs in the shorter term.

Germany’s coalition conundrum puts the whole future of Europe into doubt, says Dean Turner of UBS Wealth Management.

He told Bloomberg TV that:

The clear risk is that if Angela Merkel was not going to continue as chancellor, what would that mean for Europe?

With Emmanuel Macron elected in France, the push to rebuild the Franco-German alliance, to restructure Europe and make new reforms would be put into question.

Updated

Why German talks failed

The FT’s Tobias Buck has a good explanation of why Merkel and the Free Democrats couldn’t reach a coalition deal.

Among the core differences was the issue of refugee and asylum policy and, in particular, the issue of whether refugees should be allowed to bring their families to Germany.

In 2016, at the height of the Syrian refugee crisis, Berlin suspended that right. But the freeze on family reunifications runs out next year, raising the prospect of a spike in new arrivals.

The Bavarian CSU, the sister party of Ms Merkel’s CDU, was determined to prolong the suspension, broadly backed by the CDU and the FDP. The Greens, in contrast, insisted that refugees must be allowed to bring their spouses and children into the country, citing humanitarian reasons.

Other areas of disagreement were Germany’s response to climate change and the Green demand to shut down a significant number of coal-fired power plants, which are among the biggest producers of carbon dioxide emissions.

Tax policy, too, was a bone of contention, with the FDP demanding a rapid phase-out of the so-called solidarity tax that is raised to fund the economic development in eastern Germany.

Updated

Our correspondent in Berlin, Philip Oltermann, says Merkel’s position as Germany’s leader is now under scrutiny, following the collapse of coalition talks.

He writes:

With talks now seemingly over, Merkel could seek to form a minority government, either with the FDP or the Greens, and gather support from other parties on individual policy votes.

The Social Democrat leader, Martin Schulz, whose party has played junior partner to Merkel in the German government for the past four years, ruled out the possibility of another grand coalition under his leadership. “The voter has rejected the grand coalition,” Schulz said at a party conference in Nuremberg on Sunday.

Once all other options are exhausted, Germany’s president, Frank-Walter Steinmeier, could dissolve the current parliament and call fresh elections. To get there, however, Steinmeier would need first to set into motion a complicated process that would involve a parliamentary vote on Merkel’s role as interim chancellor.

While the debate in Germany over the past few weeks has mainly focused on policy differences between the parties, it is likely to soon shift to the chancellor, and the question of whether or not she still commands sufficient power to hold together a strong government.

The agenda: German talks collapse; Draghi testifies to MEPs

Angela Merkel speaking to the media after preliminary coalition talks collapsed last night
Angela Merkel speaking to the media after preliminary coalition talks collapsed last night Photograph: Sean Gallup/Getty Images

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Oh Mutti! German politics has been plunged into new uncertainty overnight after Angela Merkel’s attempts to form a new coalition collapsed.

Overnight, the pro-market Free Democratic Party walked out of talks with Merkel’s CDU-CSU group, and the leftwing Green party. Despite weeks of talks, the FDP, the CDU and the Greens weren’t able to carve out an agreement on migration and climate change.

This seems to have scuppered Merkel’s hopes of building a ‘Jamaica coalition’, following September’s election.

Investors are watching with considerable interest to see how Merkel reacts. Will she try to lead a minority government, which could hamper her efforts to push through legislation on issues like refugees policy, or Brexit....

Alternatively, she could push for new elections. But that has risks too -- embroiling Germany in a second campaign with no certainty that Merkel’s party would do any better than last time (when her majority fell sharply).

The financial markets have already reacted, sending the euro down almost half a cent against the US dollar to €1.175.

Dennis de Jong, managing director at UFX.com, says the FDP’s decision to quit coalition talks could have a “considerable impact” on European politics, and the markets.

“News emerging from Germany that Angela Merkel has failed to form a coalition within deadline has thrown the country into a state of political disarray for the time being, which could have a detrimental effect on the eurozone as a result.

“Germany is renowned for being the economic powerhouse of Europe in recent times, and has consistently contributed to its growth in the first three quarters of this year. Despite the single currency remaining strong for now and the eurozone stimulus programme going to plan, the ECB may choose to approach the situation in Germany with caution until political matters becomes clearer.

The euro vs the US dollar today
The euro vs the US dollar today Photograph: Thomson Reuters

The German stock market is also expected to drop this morning, as traders in Frankfurt brace for more turmoil.

German politics may hog the spotlight today, as there’s not much else in the calendar. ECB president Mario Draghi will give his views on the state of the eurozone after lunch, when he appears before the European Parliament Committee on Economic and Monetary Affairs.

In the UK, we’ll be enjoying the build-up to Philip Hammond’s budget on Wednesday.

The agenda

  • 2pm GMT: European Central Bank president Mario Draghi testifies to the European Parliament
  • 6.30pm: Bank of England deputy governor David Ramsden gives a speech at King’s College London.

Updated

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