New coalition in Germany could step up pace of reform

A likely CDU/CSU/FDP coalition under the ruling of current German Chancellor Angela Merkel in the 17th German federal election at the end of September could step up the pace of reform, according to David Moss, manager of the F&C European Equity Fund at F&C.

On September 27th Germans will vote to elect the members of the Bundestag, the federal parliament. Since the 2005 election Angela Merkel has governed in a grand coalition with the Social Democratic Party (SPD). Merkel, party leader of the Christian Democratic Union (CDU) and Germany's likely next Chancellor, is aiming to form a different coalition that would include the Christian Social Union (CSU) - the CDU's sister party in Bavaria - with the Free Democratic Party (FDP), the CDU/CSU's traditional coalition partner. A recent defeat of Merkel's party in regional elections in Thuringia and Saarland however means that she may face stronger than expected opposition at the polls.

"The grand coalition has worked out quite well as German politics are usually consensual", declared David Moss. "But the pace of reform has been slower than the market would ideally have liked." Moss believes that an alliance with the FDP would have an overall positive impact on German business as it would logically step up reform implementation and help companies to retain competitiveness. "The majority of quoted German businesses are in good condition", he added. "Unlike in other countries they have undergone heavy restructuring programs post 2000 and can boast strong balance sheets".

One of the areas which he thinks could benefit from the likely coalition is the utility sector. "While there are a lot of issues around the nuclear plants and the Green party being very keen to phase them out completely, there is a belief that a CDU/CSU/FDP alliance would seek to extend the lives of generators. However it is extremely unlikely that the utilities would be allowed to keep all the benefits", Moss continued.

"The banking system is an area where as an investor we would like to see reform, notably as far as Landesbanken are concerned as they have posted some of the biggest losses in the financial crisis", Moss commented. "One would hope that in a more free-market orientated administration such a reform might be pushed forward".

But the next election's winner will face a few challenges. The two stimulus packages have had a reasonable impact and the automotive purchase scheme has undeniably boosted auto sales although much of the demand has been for non-German cars. As the funds behind this have already run out, the government will have to decide on what to do next, reckons Moss. On the labour market front, companies have used the short working instrument in order to avoid dismissals in difficult economic situations, thus enabling employees to work less or not at all for a maximum of 6 months. Moss believes that the challenge lies in the pent up amount of new unemployed which could swell the unemployment register in the next 12 months.

"Another sizeable challenge remains the shape of the global economy as Germany is extremely reliant on exports. There is a limit to the ability of the German administration to have any noticeable influence on this", Moss said.

"On the bright side, the surprisingly good GDP figure of 0.3% in the second quarter of 2009 has led Germany - its French neighbour's GDP grew by the same amount - out of recession. The strength of both economies is helping the euro and the EU along because they have been the driving forces and the first to recover", he concluded.