Merkel's State Defeat Could Bring Uncertainty

The heavy and humiliating defeat for German Chancellor Angela Merkel's coalition in regional elections on Sunday is unlikely to derail parliamentary support for euro zone rescue measures but may bring uncertainty in financial markets, according to an analysis by Barclays Capital.

German Chancellor Angela Merkel
Getty Images
German Chancellor Angela Merkel

Merkel's coalition, make up of the Christian Democratic Union (CDU) and the Free Democratic Party (FDP), lost ground to the Greens and the Social Democrats in Baden-Wuerttemberg, where anti-nuclear sentiment has risen following the Japanese disaster.

“We believe there is currently no serious political initiative discernible in Germany, even after the two regional elections last Sunday, which would call into question the German parliament’s backing of the euro zone rescue package as it is discussed today,” Thorsten Polleit, chief German economist at Barclays Capital, wrote in a market note.

Nonetheless, German lawmakers won’t vote on the rescue package measures until September, a delay which could make markets jittery, according to Polleit.

“It will take quite some time until the German parliament will conduct its final parliamentary votes on the measures related to the euro rescue package – and it is fair to say that this fact could become a source of uncertainty in financial markets," he wrote.

The string of disappointing regional results might also spell problems for the governing liberal-conservative coalition, Polleit warned.

“It could lend further support to the more market-orientated representatives among the liberals, who then might be less inclined to adhere to the coalition policy guidelines as basically determined by the CDU. In other words, the working of the coalition could become (much) less harmonious,” he added.

Big gains for the Greens in Baden-Wurttemberg and Rhineland-Palatinate showed how worried German voters are about nuclear power, which Polleit said will step up political pressure to end nuclear production in Germany.