Rise in Green Party Fortunes Favors Deeper EU Integration
While many local pundits think the CDU/CSU will stage a revival before election day, that’s far from certain. At this stage, all we can say for sure is that forming a coalition won’t be easy (Display, right pane) and that the Greens are increasingly likely to be part of the next government. Germany’s next chancellor could even be the Green Party’s co-leader, Annalena Baerbock.
What would a Green government look like? The centerpiece of the party’s manifesto is a 70% reduction in CO2 emissions by 2030 (from a current target of 55%). But markets are more likely to focus on a 10-year, €50 billion annual investment program (1.5% of GDP) financed by higher taxes on income and wealth and a bigger budget deficit, which would require amending Germany’s controversial debt brake.
The Greens also favor deeper European integration and solidarity, partly because this is seen as an essential step toward combatting climate change. Among other things, Green policies would include a larger EU budget and enhanced revenue-raising powers, transforming the European Stability Mechanism (ESM) into a European Monetary Fund and completing the banking union.
Implemented in full, the Greens’ manifesto would represent a significant shot in the arm for European integration and lift some of the burden of supporting weaker euro-area sovereigns from the ECB’s shoulders. The main loser would probably be the German corporate sector, which would be disadvantaged by higher taxes and energy costs.
Of course it’s highly unlikely that, in a coalition government, the Greens would be able to carry out all of their manifesto commitments. Even so, the party’s involvement would almost certainly lead to a looser fiscal stance than would otherwise be the case. It’s still hard to see Germany at the forefront of global fiscal activism, but with greater Green influence at least it wouldn’t be pushing in the opposite direction.
Increased Integration and Stability Support Euro Bond Markets
More fiscal flexibility in Germany could boost euro-area sovereign-bond markets in several ways. For one, there would likely be less resistance by the “frugal” northern European countries to spend more on much-needed structural reforms in Italy. A larger EU balance sheet and subsequent closer fiscal union could also reduce some of the fiscal burden on peripheral euro-area countries.
Also, with the ECB keeping interest rates ultra-low and anchoring front-end yields, and with looser fiscal policy from Green policies, European yield curves would likely steepen further. And higher yields could attract formerly reluctant investors back to peripheral markets.
So overall, the near-term political fallout from COVID-19 is surprisingly constructive for peripheral euro-area bond markets. But ongoing ECB bond purchases remain essential for several reasons, not least of which is to maintain control of core bond yields. Things might get trickier when next year’s French presidential election comes into sharper focus—opinion polls point to a much tighter contest between President Emmanuel Macron and Marine Le Pen than we saw in 2017 (Display, below). And there’s the possibility that Italy’s fragile political unity will prove impossible to sustain.