In a note to investors, Natixis chief market strategist David Lafferty said Europe’s economic stability hinged more upon political leadership than economic institutions.
“Already this year we’ve seen [the] euro strengthen 15 per cent versus the US dollar (through early September) in the wake of establishment wins from [French President Emmanuel] Macron and Merkel, not interest rate differentials or central bank policy,” he said.
“Those recent gains could be jeopardised if Merkel, the centre of euro-stability, is weakened.”
Mr Lafferty suggested Merkel’s failure to form a coalition needed to be recontextualised by broader changes in international politics.
“The [Christian Democratic Union’s] failure to build a coalition isn’t a European crisis,” he said.
“It’s another example of the tectonic political shifts away from establishment parties and towards populism.
“This is really just Merkel having to work on less stable ground.”
However, Mr Lafferty signalled that this “less stable ground” should not be considered a “near-term market event” given the euro had stabilised and the DAX, the German stock index, was pushing higher.
“This is really a longer-term story about whether the EU can continue to further integrate and improve their institutions if German leadership is impaired,” he said.
Although the European economy has gained strength, he said there remained “much work to be done” in “both Germany and across the EU”.
“Merkel recognises that she cannot drive this process forward from a minority position. New elections would be a surprise, but she may already be boxed into a corner,” Mr Lafferty said.
On the contrary, Nikko Asset Management head portfolio manager, global credit Holger Mertens wrote in a separate note seen by InvestorDaily that politics had virtually no effect on Europe’s economy.
“It is unlikely that the political turmoil will have a lasting impact on the market, as Germany’s current economic strength is probably not impacted by the absence of a government,” Mr Mertens said.
“Financial markets have reacted very mildly to the uncertainties.
“The German stock market as well as the euro opened weaker on Monday morning, but both recovered their losses later during the session.
“For financial markets this will be only a side show.”
