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The bulls will hardly take over in Germany

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On Wednesday, December 8th, the new Chancellor and Government took office in Germany, which is interesting, as the country is Europe’s largest economy. The economic and political agenda presented by the new “traffic light coalition” (Ampelregierung) logically contains different elements compared to the previous government’s program. But the most exciting topics are found outside the new coalition agreement, for example, the position concerning the European Central Bank (ECB).

The Covid-19 crisis has hardly made any country economically stronger, and the current expectation indices for Germany show the same situation. The ZEW index (graph one) reflects the expectations of 300 professionals in Germany, where the Covid-19 development clearly plays a significant role. The same applies to the consumer confidence (graphic two), and it should be mentioned that the latest results of both indices were below expectations in the financial markets.

It emphasizes that the new Chancellor Olaf Scholz is taking over a country with a subdued mood. However, the consumer confidence has also weakened more than expected due to persistently high inflation, a concern that could have an impact on investors and the financial markets.

Understandably, the ECB is not mentioned in the new coalition agreement, but there may still be strong opinions towards ECB’s monetary policy in parts of the new government, namely within the liberal party FDP. The party got the Ministry of Finance together with party chairman Christian Lindner as the new Minister of Finance. In today’s political landscape, he will probably be seen as a “hardliner”, but in the turbulent moments that will likely occur from time to time in the coming years, there is a possibility that Lindner’s hardliner position will have a calming effect on the financial markets.

The southern European countries, on the other hand, will barely feel reassured, and quite unusually, French President Macron early on criticized the prospect of Lindner as German finance minister. The first blow could be concerning the ECB’s monetary policy, as in the FDP’s political organisation, there are strong critical voices against the European monetary policy.

An example is Daniel Föst, the FDP’s general secretary in Bavaria, who even criticises the ECB on several levels. He argues that the power of the ECB has become too robust, by being both a central bank, and at the same time, supervising the largest banks in the Eurozone. The heart of the criticism, however, is the zero-interest rate policy and the ECB’s bond purchases programme. As Föst points out, the zero-interest rate policy and the buybacks of the bonds were intended as a monetary emergency operation to be followed by economic reforms in the Eurozone member countries. Föst criticises the southern members of the Eurozone for not implementing the reforms, and therefore, the ECB’s emergency solution ended up being a lasting unhealthy economic stimulus. I could imagine that discussion flaring up before soon, and it could come in the context of renewed southern European wishes for more economic commitments from Germany.

Friday may already give an impression of the Eurozone’s expectations of the new German government. Here, Scholz meets with the French President Macron, and since the piggybank is always empty in France and the rest of southern Europe, economics will most likely be one of the themes.

Foresighted journalists questioned Scholz about this issue already on Wednesday, the very day he took office as Chancellor. Of course, he was defensive with his answer, but referred to the EU rescue fund, which is gigantic, though many may have forgotten the fund and only limited amounts have been paid out.

I argue that this point was the central key of his statement, that as long as there are funds in the EU rescue fund to pay out, then this must be sufficient. If this is the attitude that President Macron is met with, then it might be a disappointing day at the Élysée Palace in Paris.

I expect similar outcomes to be the situation for several years ahead after meetings between Germany and its southern European friends. One must keep in mind that Scholz was the Minister of Finance in the previous government, so when Olaf Scholz and Christian Lindner travel together, it is by de facto, two German finance ministers who come to visit – and it will not be easy.

My overall assessment is that the new German government will not contribute any new economic momentum for the Eurozone. On the contrary, there is a possibility that the fronts within the Eurozone can become sharper, which could put a slight pressure on the euro. But again, I see no reason to change my recommendation to underweight the Eurozone in the global equity allocation.

In the German domestic economy, green and sustainable investments will be upgraded, which has been obvious since this spring, this should already be included in the stock prices. However, I am still curious about the automotive sector, as I consider it a possibility that the sector could lose greater subsidies/indirect support than what is currently priced in the stock market.

Regarding investors’ overall consideration of whether it is “the bulls” or “the bears” who will dominate the stock market, I would say that concerning the German stock market, investors can take an early Christmas holiday – there is nothing in the new German government policy program suggesting that the bulls will take over the German stock market.

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