Despite Chancellor Angela Merkel leading federal elections on Sunday, it was rather a losing game for her CDU/CSU party as it failed to earn enough votes to form a government. Besides that, bad news arose also after the SDP party, which is currently a coalition partner to CDU, stated that it would head into opposition, leaving Merkel’s party no choice other than to seek partnership with rivals who have different views on EU policies. This brought doubts about further EU integration and consequently pushed the euro below the $1.19 key level.
The center-right CDU/CSU remained Germany’s largest party after the election outcome on Sunday with Angela Merkel securing a fourth term as chancellor. Exit polls showed that Merkel earned 33% of the votes, reaching the lowest support since 1949, while Martin Schulz, who was the candidate for the center-left SDP gained 20.5%, touching post-war low levels. In contrast, the far-right AfD party was the real winner as it managed to earn enough votes to win seats in parliament – the first time in more than half a century that a far-right party will have representation in the Bundestag. Sources suggest that the AfD party gained voters’ confidence in the former communist east after Germans protested Chancellor’s decision to allow 1 million asylum seekers to enter the country in 2015-16.
Merkel’s conservatives will now have to negotiate with other parties to secure a majority and form a coalition government after their current coalition partners, the SDP, turned down the option of renewing their cooperation. The CDU/CSU will probably aim for a three-way union with the Free Democrats and the Greens, which has been named as the Jamaica coalition due to the combined party colours of black, yellow and green.
However, this might be a long process for Merkel’s party and a threat to plans for deeper Eurozone integration as the prospective parties have different opinions on EU policies. For instance, Free Democrats oppose French President Emanuel Macron’s idea of adopting a common budget and a permanent finance minister, which would bring eurozone states closer at a time when the UK is negotiating its exit from the EU. In addition, the FDP during its election campaign
proposed changes to EU treaties that would allow eurozone members to leave the block as well as the discontinuation of the ESM bailout fund. Therefore, if the FDP becomes the new coalition partner, Macron, who is scheduled to give a speech at the Sorbonne University in Paris on Tuesday to reiterate his Eurozone ideas, would find it difficult to sell his vision and consequently increase uncertainty in financial markets.
Looking at forex markets, euro/dollar bottomed at 1.1877, reversing earlier gains made in the Asian session and losing 0.70% of its close price on Friday. Euro/yen tumbled to 133.17 after a strong rally earlier on the back of a weaker yen which drove the pair to an intra-day high of 134.22. Euro/pound declined by 0.49% to 0.8806 from 0.8849 on Friday. Disappointing readings on German Ifo business climate index released during early European trading hours also weighed on the euro.
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