Friday, September 20, 2013

Next up: the German Federal elections this Sunday

Over the past year or so people might have found themselves wondering, in their idle moments, about what has happened to the Euro crisis, which so dominated the headlines not so long ago. Remember the tensions that greeted bond offerings in Italy, Portugal, Spain and Ireland, and the political musical chairs that attended monetary and fiscal events in Greece, which spilled over into street disorder?

It has not gone away, you know, even if it is quiescent. The Euro is behaving itself, no doubt with close attention being given to the Foreign Exchange and secondary bond markets by the European Central Bank (ECB) and the Bundesbank. And it now appears that the event that is most responsible for this hiatus is about to take place, this coming Sunday.

There is every reason to believe that the upcoming German elections will be a defining day for the Euro, at least in the short to medium term. The citizens of all the federal states go to the polls. They will either return a government made up, at least in part, of the current administration that operates under Angela Merkel, or they will not.

The government personified by Angela Merkel is very pro-Euro. It is also very pro responsible fiscal and monetary policies and their imposition on those members of the Euro-zone that have shown themselves be somewhat less than dependable in relation to these matters in the past. However, in order to get re-elected, you sometimes need to pull back on potentially disruptive and controversial (controversial for many Germans because they do not go far enough in terms of austerity) prescriptions for your fellow Euro-zone states.

As always, it is impossible to foretell the future but one scenario that could play out in the weeks and months ahead is that Merkel will be returned to power, the Euro will get an immediate boost because of her pro-Euro sentiments in the past, but it will then suffer as the gloves come off in relation to outstanding matters in the Euro zone periphery and it becomes, once again, a case of “no more Mr. (or Ms.) Nice Guy”.

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