A change of power in Berlin weighs on the common currency. Angela Merkel’s party looks weak ahead of the elections in September.
The world is changing very fast, as seen during the COVID-19 pandemic. Financial markets declined so fast in March 2020, that the stock market indices moved from a bull to a bear market in record time.
The comeback was equally strong. Shortly after entering bear markets, the indices bounced back into bullish territory.
Politics is no different. Following Brexit, the two powerhouses of the European Union are Germany and France. EUR/USD traders may remember that when Macron was elected as France’s President in 2017, the market opened with a gap that did not close for years to come. Hence, politics do matter when trading financial markets, and understanding the power struggles and changes is key to being on the right side of the market.
The German elections are to be held in September, and it is proving to be a difficult year for Angela Merkel’s party, the CDU. If the Greens were towin, which recent polls suggest, the euro will feel the repercussions.
Germany – Power Shift a Game-Changer for Euro Area Politics
The common currency faired pretty well following the Brexit divorce. When the United Kingdom voted to leave the European Union, the euro, as well as the British pound, were impacted. The pound dropped as much as two thousand pips in a very short time span, but much of that has now been recouped. More precisely, on the night of the Brexit vote, the pound started its slide from 1.50, but a few weeks ago, it was trading back above 1.42. Hence, the market participants moved on and started to look for opportunities in the pound.
But the euro remains wounded. When the Brits left, the European Union lost one of its most important allies. Suddenly, Merkel and Macron took all the weight of the union on their shoulders.
In particular, Merkel’s popularity grew exponentially in the years that followed the referendum. However, the COVID-19 pandemic changed everything.
Germany, like most of the European countries, had a sluggish response to the pandemic. Lack of vaccine availability in the first quarter of 2021 led to the population turning against Merkel’s government. The rise of the Greens should therefore be viewed as an anti-establishment move – as the establishment failed when it was needed the most.
The chart above shows the Eurozone GDP projections compared to the potential. Europe had a weak response to the pandemic compared to the United States, for example. While below the potential, the economic gap with other economies will continue to grow.
As such, the German elections may signal a change that would weigh on the euro. Should the CDU lose more ground in the months ahead, the common currency will look weaker too in the global context.