The DAX index has posted small gains in the Tuesday session. Currently, the DAX is trading at 12,617.00, up 0.13% on the day. On the release front, Angela Merkel won the German election and will serve a fourth term as president. On the release front, German Ifo Business Climate slowed to 115.2, short of the estimate of 116.0 points. Later in the day, ECB President Mario Draghi testifies before the European Parliament Economic and Monetary Affairs Committee. On Tuesday, Germany releases Import Prices.
ECB President Mario Draghi testified on Monday before the European Parliament Economic and Monetary Affairs Committee. Draghi was careful not to make any headlines, as he said that the ECB would remain "patient and persistent". Draghi acknowledged that there was uncertainty regarding the inflation outlook, adding that recent volatility in the exchange rate would require monitoring. Draghi remains committed to the ECB’s loose monetary policy, saying that "ample" accommodation is still needed in order to raise inflation levels. Some policymakers have come out in favor of tightening monetary policy, with the eurozone economy continuing to grow and unemployment falling. However, inflation remains well below the ECB target of just below 2 percent. Draghi told lawmakers that he is confident that the inflation target will be met, but that would require avoiding any hasty changes to current monetary policy.
Angela Merkel may have won a remarkable fourth term as German President, but her victory appears to be somewhat hollow. Merkel’s CDU won 33 percent of the vote and will be the largest party in parliament, but Merkel will now have to barter with other parties in order to form a coalition government. The center-left SFD, which won 20 percent of the vote, announced that it will not join the CDU, so Merkel will have to negotiate with smaller parties. The far-right AFD ran on a far-right, anti-immigrant platform, and the party’s surge in support has sent shock waves in Germany and across Europe. The AFD can be ruled out as a coalition partner, which leaves the Greens and the pro-business FDP party as the most likely configuration. However, the FDP has insisted on the powerful finance portfolio and will likely try to reduce German transfer payments to the European Union. As well, the FDP has little interest in closer European integration, a cherished goal for Merkel. During the election campaign, Christian Lindner, the leader of the FDP, called for Greece to return to the drachma, underscoring the party’s opposition to Germany continuing to prop up weaker members of the eurozone.
The markets are digesting the results of the German election, and although Angela Merkel won a fourth term, the post-election picture is complicated. Merkel’s CDU party has little to celebrate, dropping from 41% of the vote in the last election to just 33% on Sunday. The result has tarnished the image of Europe’s most powerful politician and the de facto leader of the European Union. Merkel’s most likely coalition partners, the Greens and the FDP, will be looking to extract major concessions as the price for joining a coalition as junior partners. For the time being, Europe’s iron woman will need to focus her energies on forming a workable coalition and will have to put other issues on the back burner, at a time when the European Union is locked in difficult negotiations with Britain over the terms of its departure from the EU.
