(BFM Bourse) – The main index of the Frankfurt Stock Exchange rose quite significantly this Thursday after the ruling coalition in Germany broke up following the dismissal of the German Minister of the Economy.
The dissolution of the National Assembly in France last June caused significant turmoil on the Paris Stock Exchange. The CAC 40, which was hovering above 8,000 points before this major political event, has never again come anywhere near this threshold.
Political uncertainty is now spreading to Germany. Across the Rhine, Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner on Wednesday, who was replaced this Thursday by Jörg Kukies, a close advisor to Scholz.
This announcement marked the end of the German “traffic light” coalition which brought together the social democrats (SPD) of Scholz, the ecologists and the liberals (FDP) of Lindner. The ruling executive no longer has a majority in Parliament, known to be very powerful across the Rhine.
>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio
The Dax does not panic
Tensions had emerged between the FDP and the SDP around the constitution of the 2025 Budget and the direction of economic policy (in short: should we revive growth even if it means not maintaining a balanced budget). This in a degraded economic context, since Germany is struggling to return to growth, now letting its neighbors drive activity in the euro zone.
Following this decision, Olaf Scholz called for a vote of confidence in mid-January 2025. “If he lost this vote, as seems likely, he would ask Federal President Steinmeier to dissolve parliament within 21 days In the event that the president dissolves parliament, new elections should be called within 60 days,” explains UBS. Which would therefore amount to holding early elections in March.
However, this renewed political instability has absolutely no impact on the Frankfurt Stock Exchange. The Dax 40, its main index, gained 1.3% this Thursday late morning to 19,281 points.
The German market's flagship barometer may benefit from a technical rebound after falling 1.1% on Wednesday following the election of Donald Trump. The US president-elect has promised to increase customs duties on imports, which has caused concern for exporting sectors, such as German automobile groups.
Furthermore, as we explained in a previous article, the Dax 40 is in reality very little exposed to its domestic economy, and consequently to German political instability.
According to data from Goldman Sachs, only 18% of the revenues of the companies in the index are generated in Germany. For comparison, the CAC 40, although made up of very internationalized companies, displays a higher rate of 22.7% (of revenues generated in France), according to a study by the EY firm.
Towards a relaxation of the “debt brake”
Furthermore, the political risk deserves to be put into perspective. UBS notes that based on current polls, traditional coalitions (such as a grand social-democrat-conservative coalition) are likely to emerge. While the far-right AfD party has very little chance of coming to power.
In addition, this political upheaval could also allow Germany to obtain more flexibility on the “golden rule” or “debt brake” which strongly limits the budget deficit, except in the event of a significant deterioration of the situation.
“There is an opening on a budgetary policy. Once there is a new government coalition, perhaps there will be a reflection on a constitutional revision which would make it possible to escape from this debt brake which turns out to be completely toxic”, explained Gilles Moëc, chief economist of the Axa group, on BFM Business this Thursday.
“The German coalition (current, Editor's note) has not been functioning for several months, has failed to find a budgetary and macroeconomic response to Germany's current challenges due to questions of internal divisions,” he added.
“We are heading towards an end to this deadlock situation with perhaps an election in March. So we are moving towards clarification, at the pace of German institutions,” concluded the economist.
Julien Marion – ©2024 BFM Bourse
