What does the outcome of the German election mean for the euro? By MoneyCorp
Chancellor Merkel secured a fourth term at the weekend; this was as experts had predicted, but they weren’t all ready for the narrow margin of her victory, or the election of nationalist candidates from the Alternative für Deutschland (AfD) party into the Bundestag. The result is in contrast to the elections in Holland and France this year, which had suggested an end to the polarised political environment of 2016 and the rise of more centrist candidates taking power. However, now Angela Merkel must form a coalition that will not only deliver on her goals, but also manage the presence of the first openly nationalist party in German government since the Second World War.
What does this mean for the euro?
The initial response of the market was that the euro dropped against most major currencies including the pound and US$, a reaction fuelled largely by the uncertainty to come as the new coalition government is formed. The long term outlook is hard to predict, as there are too many variables. Although this uncertainty has impacted the euro, the new coalition and even the nationalist candidates are largely domestic issues for Germany. Nothing has changed which should suggest a change in Chancellor Merkel’s role in the EU, for example. While the dust settles in Germany, other events may have more of an impact – the Brexit negotiations, for example continue to make their mark on the currency exchange market. After Theresa May’s speech in Florence, the pound plunged as market analysts perceived the Prime Minister to be advocating a hard Brexit. It recovered thanks to a positive response to that speech from Michel Barnier which suggests an end to the deadlock that had been hindering the negotiations. This, coupled with the uncertainty in Germany impacting the euro, allowed the pound to rise against the euro early this week.
What does this mean for businesses?
If anyone can calm the situation in Germany, it is likely to be Angela Merkel. The narrow margin of her victory may have caught her slightly by surprise, but her experience as a politician and standing across Europe mean she is expected to take control of the situation. The election of nationalist candidates appears to be more of an anomaly rather than a trend across Europe, and therefore businesses trading with Germany and other European countries are not forecasted to face increasingly insular or protectionist measures. Although the election may deliver change in Germany as Merkel modifies her agenda to placate coalition partners, for British businesses the key issue is likely to remain as Brexit for the foreseeable future, coupled with the underlying UK economic outlook and interest rates.
We may only be able to stand back and watch what happens in Germany and with the Brexit negotiations, and follow the impact this has on the value of the pound against the euro. However, this does not mean businesses have no way to manage the impact of these changes. It is possible to plan ahead by focusing on your company’s aims and protecting the bottom line so that whatever happens next in Germany or elsewhere, you have a currency exchange policy to support your goals.
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