Merkel’s Stability Factor for Markets Adds Pressure to Run Again

  • Departure would give ‘hawks’ upper hand, Eurasia’s Rahman says
  • Schaeuble would only be interim leader, Kirkegaard says

As Angela Merkel ponders her political future, investors have a reason to want her to stay on as German leader: the threat of a market meltdown if she quits.

After more than a decade of crisis-fighting, Merkel is lauded internationally for her leadership even as domestic criticism of her agenda and style is mounting. Polls suggest a slim majority of German voters no longer want her as their chancellor going into next year’s federal election.

“Angela Merkel is, rightly or wrongly, even by those who do not like her policies, regarded as the anchoring political figure in Europe,” Jacob Funk Kirkegaard, senior fellow at the Washington-based Peterson Institute for International Economics, said by phone. “Merkel quitting would leave a significant vacuum,” with the result that “the market reaction would be quite negative,” he said.

Merkel hasn’t said whether she’ll run again in Germany’s 2017 election as her handling of the refugee crisis saps her poll ratings and drives voters to the anti-immigration Alternative for Germany. A year before the vote, support for her Christian Democrat-led bloc declined one percentage point to 32 percent in a Forsa poll published Wednesday, the lowest since June 2012.

Investors have gained experience trying to read Merkel, 62, during her almost 11 years at the helm of Europe’s biggest economy.

While Merkel fought what she referred to as the “so-called markets” for dominance during Europe’s debt crisis, she’s kept Greece in the euro area, refrained from sustained criticism of the European Central Bank and lobbied to keep the U.K. in the European Union. Her preference for stability has caused bouts of conflict with Finance Minister Wolfgang Schaeuble, who’s come to be viewed as the enforcer of German-led austerity and aversion to risk-sharing.

“It’s not that the markets are in love with Merkel, but at least they understand her position on a whole host of policies -- they understand her style,” said Mujtaba Rahman, chief Europe analyst at Eurasia Group in London. If she chose not to run again, “the hawks would have the upper hand in Germany,” meaning “tighter fiscal policy and more constraints on the ECB,” he said. “The markets wouldn’t like that at all.”

Merkel’s political choices may be less critical at home than in a European context, where her personal leadership has been decisive in various policy areas, the Washington-based Institute of International Finance said in a report on Sept. 8.

That also applies globally. Less than three months after she began her second term, rumors of Merkel’s resignation on Jan. 15, 2010, accelerated the euro’s decline against the yen in Asian trading, before her government dismissed the rumors as fabricated.

Merkel’s resignation after three terms could hand the chancellorship -- at least on a temporary basis -- to Schaeuble, the political veteran who headed the Christian Democratic Union from 1998 to 2000. Schaeuble, who turns 74 on Sunday, is already Germany’s longest-serving lawmaker and his approval rating is higher than Merkel’s.

He was overruled by the chancellor when he advocated Greece’s exit from the euro region last year, saying the country couldn’t recover without the possibility of an external currency devaluation. A critic of the ECB’s monetary policy, Schaeuble is viewed by many CDU lawmakers as a bulwark against joint euro-area debt and risk-sharing among national deposit-insurance systems.

“His position on economic policy is very well understood and would not be liked by market participants,” said Rahman.

While a Bild am Sonntag newspaper poll in August said half of Germans don’t want Merkel to run again, she hasn’t groomed any obvious successor and her party bloc still leads in all national polls. In any case, Schaeuble would be an interim leader and “it would become clear very quickly that there is really no one” after him, Kirkegaard said.

Merkel’s fall would move currency and bond markets by triggering “extreme uncertainty” about Germany’s future leadership, but it’s still a “very unlikely scenario,” Holger Schmieding, chief economist at Berenberg Bank, said by phone.

“This would create a lot of uncertainty, especially on the international scene, where Merkel still enjoys a much better reputation than she does at home,” he said.

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