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Germany’s political year is a long campaign beginning with primaries and ending with a new government. While politics are complicated, the formula for the euro is simple – more status quo is better, and success for mainstream parties is preferred over the strengthening of extreme parties, Yohay Elam, an Analyst at FXStreet, reports.

Key quotes

“Contrary to the US, counting is fast – but coalition negotiations are slow. The euro will rise if the CDU/CSU bloc, the SPD and the Greens do well. It would also cheer success for the business-friendly FDP, which has been struggling to rebuild itself. Overall, the better for mainstream parties, the higher the euro could go. On the other hand, success for the extreme-right AfD and the radical-left Die Linke (The Left) would weigh on the currency.”

“According to opinion polls, the Greens are set to come second and potentially form a coalition with the CDU/CSU bloc, potentially with the liberal FDP. Protracted talks could go on for months. If the conservatives cede ground on environmental issues, they could accept market-unfriendly policies that would hurt the euro toward the end of the year. That would be especially significant if the business-friendly FDP is not needed to form a coalition.” 

“Prospects of a repeat of the grand CDU-SPD coalition are falling as the center-left party would likely opt to rebuild itself in opposition after eight years under Merkel. On the other hand, the SPD’s leader Olaf Scholz would like to maintain the status quo. If the SPD’s showing in the elections exceeds expectations, he may push the party to repeat the same partnership. That would be the most euro-friendly outcome, but it would probably take time – a new grand coalition may wait for early 2022.” 

“Worse outcomes for the common currency are less likely. One such scenario would be a left-leaning coalition between the SPD, Greens and the hard-left Die Linke. The latter has substantial support from the former communist east and would be the preferred result of those in the SPD that oppose collaborating with the CDU. However, these three parties would find it hard to muster enough support, and working with Die Linke is also considered problematic.”

“One scenario that seems out of the question at the moment is a coalition between the CDU and the AfD. At the time of writing, all political parties reject collaborating with AfD, which is anti-immigration, and with some members leaning toward Germany’s problematic past. However, anything is possible in politics. Such a coalition would be a nightmare for the euro, as the AfD populists are also Euroskeptics.”