A bittersweet victory

Following the script, Angela Merkel was re-elected as Chancellor of Germany and is set to face her fourth consecutive term. The markets, allergic to surprises, applaud this situation. However, last Sunday's election leaves some unknowns in the biggest European economy that worries investors. "The outcome of the polls preserves continuity in the country's leadership, but it is very disappointing for the foreign minister," Amistani Asset Management strategist Tristan Perrier summarizes in a note to clients.

Merkel's party, the Christian Democratic Union (CDU / CSU), garnered 33% of the vote, less than expected in the polls. In addition, his partner until now - the Social Democrats of the SPD - announced that he moves to the opposition after suffering the worst result since 1949. The combination to form government passes through a coalition to the Jamaican - the colors of the parties involved replicate the flag of the Caribbean country - with the FDP liberals and the Greens. However, it is a unnatural union given the antagonistic positions of its members in key economic and political aspects.

"With the large coalition with the Social Democrats gone, the political agenda for the next four years is particularly opaque," warns Bank of America analysts Merrill Lynch. "The Jamaican combination would need to find a compromise between partners in energy, environment and European policies, issues in which there were major divergences in the campaign. For its part, a minority government would set a precedent in post-World War II Germany. Either option could bring uncertainty and instability, including the possibility of early elections, "they add from the US bank.

Investors argued that, given the challenge of the Brexit, the German elections gave way to Merkel to reinforce along with Emmanuel Macron the Franco-German axis to advance in issues such as banking union and fiscal convergence. However, the need for FDP means a jug of cold water to this road map. "A coalition involving the Liberals could limit plans for further European integration. The FDP will oppose creating a finance minister for the euro zone and would focus on tightening fiscal discipline to limit public deficits, "recalls analysts at the BlackRock Investment Institute.

A key portfolio

The world's largest fund manager says a key issue will be the name of the next Finance Minister, following the resignation of Wolfgang Schäuble. BlackRock even wonders if Merkel could offer it to the SPD to lure him back to the negotiating table. "This move could soften the eyes of Germany towards the countries of the European periphery and generate an increase in public spending. The European Commission has already suggested that it would be good to increase public investment to improve the economic potential of both Germany and other countries, "suggests the US manager.

The process of forming a coalition in Germany will take a long time and may be extended until December. Within three months, the European Union must decide on a probable extension of the rescue program to Greece. "Or it was even planned to deal with the idea of ​​debt relief for Greece; an idea that the liberals, by the way, has made clear that they will only support if Greece leaves the euro, "recalls Alex Fusté, chief economist at Andbank.

Another highlight of the German election campaign is the rise of Alternativa for Germany (AfD), which with a xenophobic and anti-Euro speech won 12.6% of the vote, ranking as the third political force in the country and with presence for the first time in the Bundestag. "The strong irruption of the far right, fueled by desertions in Merkel's party, who has already said that she will work to recover them, invites me to think of a certain internal involution and a right turn in her policies. That suggests less integration, "according to Fusté.

In the wake of AfD's success, experts stress that the implosion of central and center-left parties in Europe continues, and that the perception that populism in Europe died with the defeat of Le Pen in France turned out to be wrong. "It would be dangerous to say that Merkel's re-election marks the end of populism. Change is still necessary and people will continue to demand it. Since Macron won the elections in France, it seems that markets have decided that the populist advance has come to an end and that normality has returned in the political arena. However, investors may be wrong to see the outcome of the far right in Germany, "concludes Nick Clay, manager of Newton (BNY Mellon).