As Europe adjusts to the news that talks to form a new German government have fallen apart, Max Liu discusses how the betting markets have reacted and asks Angela Merkel will do next.
"If there are new elections, they will probably be in February or March. With Germany the central player in the European Union, that could delay Brexit negotiations and we'd see shorter odds than the current 1.728/11 on Britain remaining in the EU beyond the March 2019 deadline."
Angela Merkel is on the drift in Betfair's Next German Chancellor market following the shock news that talks to form a new coalition in the Bundestag collapsed just before midnight on Sunday.
Merkel, who has been chancellor since 2005, is 1.152/13 to get a fourth term, but her failure to form a coalition has stunned Europe. This morning, Martin Schulz, who lead the Social Democratic Party (SPD) to defeat in September's elections, saw his odds narrow from 10.09/1 to 8.07/1 to be next chancellor.
Germany is the powerhouse of Europe and Merkel is the continent's longest serving leader. Many people see her as a bulwark against the power of US President Donald Trump and Russian president Vladimir Putin. Her name is a by-word for stability and sound judgement, so any instability in Germany is bound to spark concern elsewhere in Europe, especially when things are so unpredictable in other countries. Overnight, the Euro slid in value against the yen, the dollar and even the Brexit-tainted pound.
What exactly is happening in Berlin?
With its whirl of acronyms, German politics can be difficult to follow. Merkel's Christian Democratic Union (CDU) won the elections in September, receiving 32% of the vote, followed by the SPD (20%). However, the CDU wanted and expected to win by a bigger margin and Merkel's authority was diminished by the result. Schulz ruled out a return of the "grand coalition", between the CDU and SPD, so Merkel has had to look elsewhere for partners.
For the past month, Merkel has been trying to forge a coalition with the CDU's sister party the Christian Social Union (CSU), the pro-business Free Democratic Party (FDP) and the Green Party. Last night, the FDP walked out, saying they disagree with Merkel's economic vision and distrust the CDU. But immigration is probably the issue on which the parties are most divided. This no surprise; the surprise is that Merkel has failed to reconcile their differences sufficiently to form a government.
What are Merkel's options?
Prior to the collapse of the talks, a coalition between the four parties in the negotiations was odds-on in the Next Government market. Now it's on the drift at 2.111/10 and Any Other Coalition is in to 2.0421/20. Merkel was today holding an emergency meeting with President Frank-Walter Steinmeier.
As the biggest party, the CDU could try to form a minority government. However, there's little precedent or appetite for that in Germany and Merkel need only look at Britain's enfeebled PM to see that it's very difficult to get anything done with such a set up. On the other hand, Merkel is a shrewder operator that Theresa May and has served 12 years as her country's leader, so perhaps the CDU will go it alone.
Steinmeier has the power to dissolve parliament and call fresh elections. First, though, he'd need to set into motion a parliamentary vote on Merkel's role as interim Chancellor. Her party might ask her to stand aside and allow someone else to lead them into the new elections. But experts say the CDU has a shortage of candidates to replace her. More broadly, there's the danger that the far right Alternative for Deutschland, which entered the parliament in the September elections, will gain more seats if there are new elections.
For British readers, there are implications for Brexit. If there are new elections, they will probably be in February or March. With Germany the central player in the European Union, that could delay Brexit negotiations and we'd see shorter odds than the current 1.728/11 on Britain remaining in the EU beyond the March 2019 deadline.
This is an unprecedented crisis for post-war Germany and, while it's premature to hail the end of Merkel, it could be the beginning of the end of her chancellorship. The most formidable European leader of the past decade is fighting for her political life.