The members of Germany’s Social Democratic Party (SPD) unexpectedly chose a decidedly left-wing duo as their new leaders over the weekend. The junior partner in Chancellor Angela Merkel’s government, the SPD can in theory determine the fate of the ruling coalition — either by deciding the end of it, or by trying to modify its policies.
The two winners who will now lead the SPD, Saskia Esken and Norbert Walter-Borjans, notably campaigned against “black zero” — the self-imposed rule that forces German governments to present balanced budgets every year. But markets shouldn’t hold their breath for a significant fiscal boost just because the SPD has turned left. The euro EURUSD, +0.0545% didn’t move on the news on Monday.
There are two reasons why more of the same in German fiscal policy is likely.
The first is that Merkel’s conservative party, the Christian Democratic Union, seems to be turning to the right in perfect symmetry with the SPD’s left turn. The CDU still calls the shots, and recently thought it opportune to insist that it had a “fetish” about balanced budgets. Furthermore, the loser of the SPD’s leadership contest, Olaf Scholz, is also the current finance minister, and is unlikely to agree to a policy change in the short term.
The second reason not to wait for the type of fiscal stimulus that Christine Lagarde, the new European Central Bank president, has called for is that confidence indicators suggest German businessmen are beginning to look at the future through rosier glasses. The fact that the economy dodged recession this year — however narrowly — seems to boost the government’s confidence that nothing more needs to be done. The economy was supported this year by a mild fiscal stimulus due to tax cuts decided at the end of last year.
Germany will end the year as the EU’s economic laggard, with gross domestic product up 0.5% or less. But markets may have to wait for new elections and another government before seeing any movement on the fiscal front.