LIVE MARKETS-How German elections can affect financial markets
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HOW GERMAN ELECTIONS CAN AFFECT FINANCIAL MARKETS
The upcoming German elections on Feb. 23 could have significant implications for financial markets, with UBS anticipating that potential stalemate over fiscal policy following the vote would negatively impact the euro.
Conversely, a government policy aimed at boosting growth is viewed as positive for the euro and the safe-haven status of Bunds.
The sticking point is whether the new government will uphold a reform of the so-called 'debt brake', which could be a crucial step to support economic growth.
Here are the three possible scenarios depicted by Felix Huefner, German economist at UBS:
1. Stalemate scenario (25% probability). No agreement on fiscal easing and a lack of agreement on substantial policy change, leading to a weaker growth outlook.
2. Modest cyclical lift scenario (60% probability), where the debt brake is reformed, with more public spending on defence and modest additional support for households and corporates. Growth would rise back to its potential level of 0.8% by 2026, but structural headwinds remain.
3. Growth boost scenario (15% probability). Substantially higher fiscal spending and a structural reform agenda that, raises Germany's medium-term potential growth rate.
The latest opinion polls see the centre-right CDU/CSU in first place. However, to form a majority, they will need to find a coalition partner, potentially the Social Democratic Party (SPD ) or the Greens, making radical shifts less likely.
(Stefano Rebaudo)
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