The German elections marked the end of the Grand coalition between the Christian Democrats and SDP. It was a dreadful night for the SDP, down at 23% of the votes cast. Frau Merkel's CDU also lost votes and vote share, coming out with just one third of the votes. The two main parties that dominated post-war German politics slumped to under 57% together. The Greens, and the radical left took away SDP votes. The Free Democrats scythed in to the CDI position.
What were German electors trying to tell the two main parties? They were saying that their efforts to appear the same as each other and to govern together in a consensual coalition on the so called centre ground was the last thing voters wanted. They did not think it was good for Germany. The larger group of critics of the Grand coalition sided with those who want less government, lower taxes and more freedom. The smaller group sided with those who want more government and more centralised leadership and more green policy.
The most interesting thing in the election was the great success of Guido Westerwelle, the leader of the Free Democrats, in boosting his party’s support. He condemned the car scrappage scheme as an expensive nonsense. He called for a cut in the top rate of tax from 45% to 35% to make Germany more competitive and enterprising, and a cut in the lower tax rate from 14% to 10% to cut poverty and boost private spending. He said of the Grand coalition it was only grand at "raising taxes and accumulating debt. It has frittered away billions in tax money.” The Free Democrats want to strengthen civil liberties, reduce state power and keep nuclear power stations.
Frau Merkel now has to decide what she wishes to do. Early indications are that she will try to tone down the pro-business pro-freedom radicalism of the Free Democrats, preferring to govern with the establishment and the central consensus as she sees it. If Herr Westerwelle ends up as Foreign Minister, it will be more difficult for him to exercise his economic radicalism. He will have his hands full trying to get German troops out of Afghanistan. Nonetheless, it does mean some strengthening of those international voices which wish to move more quickly to end special measures, curb public spending, and free private sectors to recover and compete - a very different approach to the Brown/Obama approach we have seen on offer at the G20.
The G20 itself decided to delay new banking regulations, and to spend more quality time on the issue of Iran. The Communiqué said they now needed to find a sensible path to rebalance economies and in due course move away from special measures, without setting out any detail of how they might do this.
Meanwhile, this week we need to watch the pound, which is has been on the slide thanks to comments by the Governor and the Bank of England, and thanks to the very easy money policy being followed by the authorities. Markets have a habit of forcing issues before governments would like to tackle them. We continue to advise clients to avoid UK commitments, to have equity investments in Asia and other emerging markets, and to shift gilts into corporate bonds for a better yield.