Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 20 November 2017 at 10:36 GMT

Macro Digest: Angela Merkel's three options — #SaxoStrats

Chief Economist & CIO / Saxo Bank
  • German coalition talks break down
  • Political centre, German leadership in peril
  • Odds favour the calling of a new election
Angela Merkel
Merkel agonistes... Photo: 360b /

By Steen Jakobsen

German chancellor Angela Merkel has failed to build a new government after coalition talks broke down Sunday. The Free Democratic Party made the decision to leave as the strategy paper tabled left its members feeling compromised on issues ranging from refugees to the environment and energy.

This sent EURUSD from over 1.18 to below 1.1750 ahead of today's European bell (it has since rallied to the 1.1790 area) and we expect the broader uncertainty to spill over into markets as faith in Merkel – and German leadership overall – pauses.

There is a rising chance that Merkel could resign (the odds have risen to 25% from 0%) but the most likely outcome is new German election in the next 60 days. 

We, along with Saxo Bank head of FX strategy John Hardy, see the positive EURUSD bias as intact as long as the 1.1675-ish area holds.


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Source: Saxo Bank

All of this leaves three options for Merkel this week...

A grand coalition (odds at 20%): This would mean a repeat of the last election's sharing of power between SPD and CDU/CSU. This is extremely unlike as SPD party leader Martin Schultz has been running on a platform of “being the opposition”.

Having said that, there could be movement in this possibility if:

  • Merkel steps down... the SPD through Bundestag vice-president Thomas Opperman has indicated that if Merkel resigns then “…in der tat eine neue situation” (then that is a new situation). 
  • It also expected that Bundespräsident Steinmeier will apply pressure on his own party, considering that the only true majority sits with grand coalition. 
  • Finally, it’s well known that Foreign Minister (and former SPD head) Sigmar Gabriel is keen on remaining in the Foreign Office. 

Minority government (20%): This would be with the Greens or FDP. There is no history of minority government in Germany since World War II, and in turbulent times German politicians generally want to avoid a Bundestag wherein an vote of confidence in constantly around the corner.

The only appealing part of a minority government is the alternative: a new election .

New election (60%): This is now considered the most likely result. There are, however, some procedural issues which need first to be cleared up. First, the new Bundestag must be dissolved; this could happen through a simple vote of confidence. This was used by Chancellors Brandt, Kohl, and Schröder before, but Merkel is blocked this procedure as she is only “caretaker Chancellor”.

According to Article 63 of the German constitution, Bundespresidänt Steinmeiersuggest would Merkel for chancellor, a measure that would then go to a vote. If the motion is accepted, the Bundespräsident has two options...  to appoint Merkel as chancellor or dissolve the Bundestag. He has seven days to make this decision and a new election would be held within 60 days.

Failure in slow motion

There is a real sense of shock in German politics this morning. Die Zeit, for instance, ran the story under the headline "Failure in slow motion", stating that the FDP's departure from coalition talks has left CDU and the Greens in a state of shock.

To me, this is yet another example of how “more of the same” is not going to cut it for politicians globally as voters revolt against the “safe pair of hands” idea.

After the German election last September, voters were very disappointed that the real issue of immigration was not discussed. Voters, despite having lost their trust in politicians, are still looking for direction on immigration, as well as the environment and energy.

Merkel has found out that “just not talking about it” no longer works. The next few weeks in German politics will be a wake-up call: Merkel could be gone if no new election takes place, or Germany could see a new election campaign where hiding from the three issues above will cost the centre votes and leave far-right and far-left parties – both offering clear but primitive messages – in the lead.

Germany and Merkel have been Europe’s leaders through the difficult 2000s and 2010s, mostly through their continuing offer of defensive and slow guidance.

Now, however, Germany needs to find a new path... and the clock is ticking.

Berlin city hall
Berlin's challenges, as well as its time constrains, are significant. Photo: Shutterstock

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank

06 December
stas_ms stas_ms
Steen, good afternoon! Tell your mail to send an annual Outrageous Prediction 2018. Thankful in advance.


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