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What the German Elections Mean for the Eurozone

Armin Laschet, a candidate for the prime minister of the Christian Democratic Union of Germany (CD).

Sean Gallup | Getty Images News | Getty Images

The next election in London — Germany could disappoint other European governments seeking integration in a single currency area. This is a delicate topic that many market players monitor.

Countries in the 19 euro area follow the same currency rules and share the same currency, but fiscal policy is still determined at most national levels. This often raises concerns every time a crisis occurs in the area. This is because the euro area often takes time to coordinate complex responses. These concerns can be reflected in the rising costs of the euro government trying to borrow money from the public market.

“The announcement of the CDU election manifesto suggests that the next German government is unlikely to drive drastic reforms and deepening eurozone integration,” said Carsten Brzeski, global head of macro at ING Germany. Said in a memo on Tuesday.

CDU, Prime Minister Angela MerkelPolitical parties are currently leading polls. Expected voting At a rate of 28%, the Greens are followed by 20%, followed by the Socialist Party, the SPD Party, at 16%.

Currently, the conservative CDU party and its leader, Armin Laschet, play a key role in Germany’s approach to European integration.

The CDU / CSU seems to represent a practical “weiterso” (almost the same).

For many years Germany has been one of the most cautious euro member states regarding fiscal consolidation. The idea that German taxpayers would eventually have to pay for the financial mistakes of other very debt-rich eurozone countries was taboo between the public and the political situation.

However Coronavirus The pandemic changed its dynamics when Merkel decided to support the EU joint debt sale plan. As a result, more money was spread throughout the EU, limiting the economic damage caused by the crisis.

Known as the Next Generation Fund, this exercise is described as a one-off measure to address an unprecedented shock. But at the same time, some countries and EU authorities believed it was also the first big step towards more fiscal consolidation.

Market players became more confident about the future and stability of the EU when the European Commission announced in July that it would open up markets on their behalf.

However, as the Germans are preparing to elect a new prime minister in September, the wind could soon blow in another direction.

The CDU said in its manifesto that it would accept revisions to EU fiscal rules, but would not ease them.

“In fact, it insists on stricter implementation of future fiscal rules,” Brzesko said, and said the European Reconstruction Fund “should remain temporary.”

Other experts share this view.

“At the European level, all (German political parties) want to strengthen European integration, but the way they do it is different. CDU / CSU is a practical” Waiter Saw “(almost the same),” said a Bellenberg analyst. Seems to represent. ” Please note Tuesday.

Eric Jones, a professor of European studies at Johns Hopkins University, told CNBC in an email: Go back to the old financial rules. This (CDU) manifest seems to suggest that it should happen as soon as the crisis is over. “

If Germany tightens prematurely, it will be a problem not only for Germany, but also for other eurozones and the European Union.

Guntram Wolf

Director Bruegel

Following the coronavirus pandemic, the euro area has agreed to lift the rules on budget discipline, giving each capital more room to respond to the crisis. This decision, commonly known as deactivating the escape clause, is valid until at least the end of 2022.

The CDU manifesto could push Germany to reintroduce fiscal rules as early as 2023, even though other euro member states are hesitant to return to a conservative budget shortly after the pandemic. Indicates that there is.

In fact, the Commission suggested earlier this month that debtors should pay attention to public spending, but also continue to invest.

“The Commission’s recommendations are actually groundbreaking, an important step in the direction of what the new fiscal rules will be, and for the transition of green and digital twins,” said an analyst at a consultancy firm. We are trying to protect not only public investment but also social investment. ” Eurasia said in a memo.

One of the big debates in the euro area later this year How to reform financial rules Before they are reintroduced.

“It will be difficult to argue and it will not be easy to reach a consensus,” an Eurasian analyst said.

But no matter what the eurozone decides to do, the new German leader will ultimately influence how the region works in either way.

“If Germany tightens prematurely, it’s a problem not only for Germany, but for other parts of the euro area and the European Union,” said Brussels-based think tank director Guntram Wolf on CNBC’s “Squawk Box Europe.” Told to. “On Thursday.

Germany is the largest economy in the euro area and has strong trade and economic ties with its neighbors.

What the German Elections Mean for the Eurozone

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