"Worst Case Scenario" Looms As Merkel"s "Jamaica Coalition" Collapses; EUR Sinks

We warned on Friday that German Chancellor Angela Merkel faced a "night of the long knives" in her efforts to bring together the co-called "Jamaica" coalition of four parties and after a desperate weekend of talks, Bloomberg reports Merkel"s efforts at forming a coalition have failed meaning a second election looms and sending the euro sliding.

As Bloomberg reports, talks on forming German Chancellor Angela Merkel’s next government collapsed, throwing the future of Europe’s longest-serving leader into doubt and potentially pointing the world’s fourth-biggest economy toward new elections.

After a 12-hour negotiating session that ended shortly before midnight Sunday, the Free Democratic Party walked out of the exploratory talks, saying the differences with the Green party were too great to bridge.

Merkel has sought for four weeks to enlist the two smaller parties for her fourth-term coalition.

“It’s better not to govern than to govern badly,” FDP head Christian Lindner told reporters in Berlin.

No further coalition talks were scheduled, he said. There was no immediate comment from Merkel.

EURUSD is down aropund 40 pips on the news...

As MINT Partners" Bill Blain noted previously, Germans are not used to multiple elections – and a second vote early next year would be massive negative for Merkel herself – she may even have to stand down if coalition looks like falling. That could be massive shock.

As a result, the prospects for more volatile European peripheral markets, particularly Greece and Italy, are likely to be exacerbated, and we might well see some of the currency and European stock market froth blow away in coming days as the scale of the “German Problem” becomes clearer.

• My worst case Germany scenario is a second election early next year, political uncertainty as Mutti Merkel finds herself squeezed out, and a scramble to build a new coalition government in her aftermath.


• The best case scenario isn’t much better: that Merkel manages to forge a new coalition, but it will be a long drawn out affair and the resulting administration will be vulnerable, weak and fraxious.

These sound like German problems, but they mean the “leader of Europe” is likely to be entirely inward focused in coming months/years.. at a time when the European union will be facing a host of new issues regarding closer union, banking union and reform of the ESM, bailout and QE policies. There will also be new potential crisis points – Italian elections next year, Greece bailout, renewed immigration crisis or a blow-up with Trump. And these are just the known unknowns.

This has profound implications for the so-called French/German axis as it slides towards Paris. We are not going to see a new German government “waste time” on issues like closer EU union, European Banking Union, or critical finance issues like reforming ESM or new approaches on QE and Bailout funds. Forget Wiedemann for ECB president, it’s more likely to another Frenchman (Trichet II) – I’m sure its already underway. In short.. Germany negotiations could get very fraxious while Europe is dragged down in its wake. I doubt the markets have discounted it yet.

In Major Disappointment, Merkel Wins German Election Despite Worst Result Since 1949; AfD Surges To Enter Parliament

The German polls have officially closed, and the first exit polls numbers come in, confirming the expected fourth victory for Angela Merkel"s CDU/CSU, however getting a unexpectedly low 32.5% of the vote, which according to Europe Elects was the worst result for Merkel"s CDU/CSU (EPP) since 1949. Merkel"s main challenger, the SPD, got 20%, also its worst result since Nazi era 1945; furthermore, the SPD has said it plans to enter the opposition, collapsing the current CDU/CSU-SPD "grand coalition." 

In other words, just like in the recent Franch elections, the German establishment was just trounced:

• Worst result for Merkel"s CDU/CSU since 1949
  


• Worst result for SPD Since 1945

Meanwhile, there was an unexpected surge for the newcomers: the dramatic (late) surge for the nationalist AfD party, which got a higher than expected 13.5% of the vote, has made it not only the third most popular German party but also the first far-right German party to enter the Bundestag in 60 years.

The first exit poll breakdown from ARD is as follows.

• CDU/CSU - 32.5%


• SPD - 20%


• AfD - 13.5%


• FDP - 10.5%


• Greens - 9.5%


• Left party - 9%

An exit poll from ZDF has a similar breakdown:

• CDU/CSU-EPP: 33.5%


• SPD-S&D: 21%


• AfD-ENF: 13%


• FDP-ALDE: 10%


• LINKE-LEFT: 9%


• GRÜNE-G/EFA: 9%

Even more troubling for the German establishment is that the far-right AfD was the second strongest party in former Eastern Germany:

Germany, ARD exit poll: Far-right #AfD (ENF) second strongest party in former Eastern Germany. #btw17 #Wahl17 pic.twitter.com/wXwzFlZ2Zp

— Europe Elects (@EuropeElects) September 24, 2017

According to the Exit Poll, the likely coalition options include CDU/CSU-SPD or CDU/CSU-FDP-GREENS. The various possibilites are shown below.

However, according to SPD"s Schwesig, the leadership is united on entering opposition, meaning a grand coalition is unlikely and the CDU may have to settle for a government with the FDP and the Greens, a so-called "Jamaica Coalition." 

* * *

Contrary to earlier reports of muted participation, Europe Elects predicted today"s turnout could be as high as 80 per cent, potentially the highest turnout of the past two decades.

Germany, turnout:

2005: 77.7%
2009: 70.8%
2013: 71.5%
2017: ~80% (prognosis)#btw17 #gehtwaehlen

— Europe Elects (@EuropeElects) September 24, 2017

Furthermore, as Europe Elects adds, today could mark the highest turnout in a key German state since 1988.  In Sachsen-Anhalt, as of  4pm, turnout today is around 56 per cent - quite a bit higher than in 2013, 2009, 2005 and 2002. Turnout is not quite as high as 1988 yet, when turnout was around 62 per cent at the same time.

Germany (Sachsen-Anhalt), turnout at different times of the day. Highest turnout since 1998 so far. #btw17 #gehtwaehlen pic.twitter.com/1CxVkjLQRS

— Europe Elects (@EuropeElects) September 24, 2017

Turnout is particularly significant in this election, as fewer CDU and SDP voters heading out to their booths means a larger vote share for the AfD.

German Establishment Routed: AfD Second In Former East Germany; Result "Less Market Friendly Than Expected"

The first sellside comments on today"s German elections - which as a reminder was a disaster for the German establishment, following the worst showing for the CDU/CSU since 1949 and the worst result for the SPD since 1945 with support for both parties tumbling since the 2013 elections...

... have started to trickle, in and according to SEB, the result is ‘less market-friendly’ than expected.

Quoted by Bloomberg, SEB cross-asset strategist Thomas Thygesen said that the result is a victory for Angela Merkel as expected, but her mandate going into negotiations about deeper euro integration does not look quite as strong.

"It looks like marginally less market-friendly than expected,” Thygesen said adding that “I’d say this is in line with our expectation that the euro would pause around $1.20 vs dollar and then maybe retrace a couple of percent over the autumn.”

“The AFD above 10% suggests that even here the stakes are high: if the European project doesn’t fly this time in a way that voters like, Germany could look less politically stable in a few years.”

A note from Pantheon"s Claus Vistesen is similarly concerned about the election outcome and the viability of the upcoming coalition:

At a first glance, it seems that building a coalition government will be a little trickier than markets had expected. If the exit polls prove accurate, the major parties—CDU and SPD—have suffered a drastic setback compared to the elections in 2013. CDU is projected to come out top with 32.5, of the votes, but this is far-, from the 42% in 2013. Similarly, the social democratic SPD have been pegged back to 20%, compared to just under 309, in 2013. The voter-flight from the two main parties appears to have gone in two opposite directions. The populist—and nominally EU sceptic—AFD is set to become the third-biggest party in the Bundestag with 13.5% of the votes, significantly better than the polls were predicting heading into today"s vote. But the liberal FDP also is expected to have had a good day, securing 10.5% of the votes.

Assuming the exit polls are accurate, Angela Merkel—who almost surely will remain as chancellor—has two options, assuming that a government with AFD is out of the question. She can form a two-party grand coalition with SPD or she can go for a coalition with the greens—set to gain 9.4%—and FDP. Our bet is on the latter—we doubt the SPD will go into a grand coalition given its after all scathing defeat—but this will be a slender coalition. Mrs. Merkel is a battle-hardened builder of coalitions, but she will need to draw on all her experience to form one, which can actually get things done.

On balance then, we see the exit polls are slightly negative from the point of view of risk assets in the Eurozone and the euro exchange rate.

The result also increases the risk of re-elections, but we would put the probability of this at under 15%.

* * *

Finally, in yet another shock for Germany"s establishment, according to Europe Elects, the nationalist AfD was the second strongest party in former East Germany, the more economically backward segment of Germany.

We now await other analyst observations which we expect will be equally dour on today"s election result, and as a result the EURUSD is set to tumble once it opens for early trading.

German Election September 24: What Are The Coalition Possibilities?

Authored by Mike Shedlock via MishTalk.com,

Angela Merkel would like her CDU/CSU to have an outright majority. That does not look possible according to the latest German Election Opinion Polls.

Her second preferred choice, a coalition with FDP is not looking very likely either. Is another “Grand Coalition” in the works?

Coalition Math

• CDU + SDP (Black Red): Another “Grand Coalition” 61%


• CDU + FDP + Greens (Black Yellow Green dubbed “Jamaica”) 51.5%


• CDU + FDP (Black Yellow): 45%


• CDU + Greens (Black Green): 43.5%


• SPD + FDP + Greens (Red Yellow Green dubbed “traffic light”) 38.5%


• SPD + FDP + Greens + Die Linke (red red Green Yellow) 48.5

46% Still Undecided

As of August 23, Politico reported Almost Half of German Voters Undecided.

Forty-six percent of German voters do not know who to vote for in the September 24 parliamentary election, according to a poll published in Wednesday’s edition of newspaper Frankfurter Allgemeine.

The newspaper said the share of undecided voters this close to an election was higher than at any point in the past 20 years. Yet at the same time, 45 percent of those surveyed believe the outcome of the election is already decided — the highest percentage since German reunification.

It takes 50% to form a government.

But all of the other parties will not form a government that includes Alternative für Deutschland (AfD), the anti-immigration, eurosceptic. Merkel has also ruled out Die Linke.

Unless CDU/CSU plus FDP cannot top 50%, forming a government is likely to take months.

If AfD and Die Linke get a combined 25% of the vote or more, coalition possibilities shrink.

Almost anything can happen, including new elections, if SDP refuses to enter a coalition.

Europe's Cities Absorb Sharia Law

Authored by Giulio Meotti via The Gatestone Institute,

• London Mayor Sadiq Khan banned advertisements that promote "unrealistic expectations of women"s body image and health". Now Berlin is planning to ban images in which women are portrayed as "beautiful but weak, hysterical, dumb, crazy, naive, or ruled by their emotions". Tagesspiegel"s Harald Martenstein said the policy "could have been adopted from the Taliban manifesto".


• The irony is that this wave of morality and "virtue" is coming from cities governed by uninhibited leftist politicians, who for years campaigned for sexual liberation. It is now a "feminist" talking point to advocate sharia policy.


• To paraphrase the American writer Daniel Greenfield, the irony of women celebrating their own suppression is both heartbreaking and stupefying.

Within days after the Islamic State conquered the city of Sirte in Libya two years ago, enormous billboards appeared in the Islamist stronghold warning women they must wear baggy robes that cover their entire bodies, and no perfume. These "sharia stipulations for hijab" included wearing dense material and a robe that does not "resemble the attire of unbelievers".

Two years later, Europe"s three most important cities - London, Paris and Berlin - are adopting the same sharia trend.

Paris has said au revoir to "sexist" ads on public billboards. The Paris city council announced its ban after the Socialist Mayor Anne Hidalgo said the move meant that Paris was "leading the way" in the fight against sexism. London Mayor Sadiq Khan also banned advertisements that promote "unrealistic expectations of women"s body image and health". Now Berlin is planning to ban images in which women are portrayed as "beautiful but weak, hysterical, dumb, crazy, naive, or ruled by their emotions". Der Tagesspiegel"s Harald Martenstein said the policy "could have been adopted from the Taliban manifesto".

The irony is that this wave of morality and "virtue" is coming from cities governed by uninhibited leftist politicians, who for years campaigned for sexual liberation.

There is a reason for this grotesque campaign banning these images. These cities host significant Muslim populations; and politicians -- the same who frantically are enacting mandatory multiculturalism -- want to please "Islam". It is now a "feminist" talking point to advocate sharia policy, as does Linda Sarsour. The result is that, today, few feminists dare to criticize Islam.

It is happening everywhere. Dutch municipalities are "advising" their employees to not wear mini-skirts. There are women-only hours at Swedish swimming pools. German schools are sending letters to parents asking children to avoid wearing "revealing clothes".

The first to suggest calling for a ban on posters or advertisements that "reduce women or men to sexual objects" was German Justice Minister Heiko Maas, a Social Democrat.

"To demand the veiling of women or taming of men," said Free Democratic Party leader Christian Lindner, "is something known among radical Islamic religious leaders, but not from the German minister of justice."

In 1969, Germany was overwhelmed by a debate on introducing into schools the "Sexualkundeatlas", an "atlas" of sexual science. Now the effort is to desexualize German society. The newspaper Die Welt commented:

"Thanks to Justice Minister Heiko Maas we finally know why on New Year"s Eve, at Cologne Central Station, about a thousand women were victims of sexual violence: because of sexist advertising. Too many eroticized models, too much naked skin on our billboards, too many erotic mouths, too many miniskirts in fashion magazines, too many wiggling rear-ends and chubby breasts in television spots. It is another step in the direction of a "submission"".

Instead of nipples and buttocks, Die Welt concludes, "should we urge the use of burqa or veil, as Mrs. Erdogan does?"

The same German élites who suggest banning "sexist" billboards censored the crude details of the mass sexual assaults in Cologne. Meanwhile, a liberal Berlin mosque, which banned burqas and opened its door to gays and to unveiled women, is now under police protection after threats from Muslim supremacists.

Europe"s élites have adopted a double standard: they are proud to host an exhibit of a Christian crucifix submerged in urine, but quickly capitulate to Muslim demands to censor cartoons of the Islamic Prophet Mohammed. The Italian authorities went to great efforts to spare Iran"s President Hassan Rouhani a view of nudity on ancient sculptures in the Capitoline Museums of Rome.

The Western public appears fascinated by Islamic veils. Ismail Sacranie, a founder of Modestly Active, the manufacturer that designs burkinis, told the New York Times that 35% of their clients are non-Muslim. Aheda Zanetti, a Lebanese woman living in Australia who invented the burkini, claims that 40% of her sales are to non-Muslim women. The Western public, which has been romanticizing Islam, is apparently absorbing the pieties of Islamic law. The Spectator called it "a new puritanism" and "why some feminists make common cause with Islam".

To paraphrase the American writer Daniel Greenfield, the irony of women celebrating their own suppression is both heartbreaking and stupefying.

Europe might soon have to apologize to the Mayor of Cologne, Henriette Reker. She was criticized -- denounced -- for advising women to keep "at an arm"s length" from strangers to avoid sexual harassment.

If the West keeps on betraying the democratic value of individual freedom on which Western civilization is based, Islamic fundamentalists, like those who imposed burqas on Libyan women, will start imposing them on Western women. They may even begin with those feminist élites who first created the sexual revolution to emancipate women in the 1960s, and who are now infatuated with an obscurantist garment that hides women in a portable prison.

If the West keeps betraying the democratic value of individual freedom, Islamic fundamentalists, like those who imposed burqas on Libyan women, will do the same to Western women. (Photo by Alexander Hassenstein/Getty Images)