Germany Election 2013: Investors Happy with Merkel Still In Charge

The election in Germany is very important, albeit not so very much in the very short-term.

I still think the Christian Democratic Union (CDU)/ Christlich-Soziale Union (CSU)/ Free Democratic Party (FDP) coalition may sneak back in but most investors seem happy enough as long as Chancellor Angela Merkel stays in charge.

Even she will have to go along with the abandonment of austerity being plotted increasingly openly in many Economic and Monetary Union (EMU) countries.

French President Francois Hollande has clearly given up on it and Italian Prime Minister Enrico Letta and Spain's Prime Minister Mariano Rajoy seem to be preparing to do so.

The governments of Greece, Portugal, Cyprus and Ireland have no other choice if they want to get re-elected.

The EU Commission is rumoured to be helpfully rejigging the definition of 'structural deficit' to take account of high unemployment so that struggling Southern European counties can somehow meet their deficit targets after all.

It all seems to be based on hopes on the part of politicians that the end of recession is either the same thing as rapid recovery or will inevitably bring it about.

Investors Buy Into Optimism

Amazingly, investors and even some economists (shock and horror!) are buying into this heroic politically correct optimism, seemingly as confident as Charles Dickens' Micawber that 'something will turn up'.

This week's flash PMI surveys from Germany and France are, however, unlikely to settle much and Spain's retail sales may require passing lightly over.

One consequence, surely unintended, of last week's FOMC's decision is to undermine further the credibility of Bank of England's Governor Mark Carney and European Central Bank President Mario Draghi's versions of forward guidance.

Hopefully, this reaction may remain confined to the financial markets but it would be very unhelpful if it also put off businesses from new investment.

The gilt market is signally failing to share in the reduction of yields in the US and Europe but at least the punters are hesitating over adding to the pound's 5% rally over the last few weeks. What won't go up may well start to go down.

Party Time in the UK

Party time in the UK continues with Labour, amidst lurid tales of internecine strife amongst the comrades. This must be most unwelcome to Labour Party leader Ed Miliband who is another to resemble Micawber in hoping that nobody notices that he is really a closet Old Labour man while he relies on UKIP to dish the Tories.

Meanwhile, Nick Clegg has had a good conference, not least in outsmarting the increasingly skittish Vince Cable but he stands little chance of the party staying in office after the 2015 election: a second time around with the Tories would provoke an identity crisis while Labour's price would be insultingly high for a party that has shared in tough decisions over the last three years.

It still seems to be all about nasty Tories vs. incompetent Labour, even though both descriptions are a bit unfair. Last week's public debt, inflation and CBI new orders figures will have helped George Osborne's personal Goldilocks scenario, as should this week's third cut of Q2 GDP: warm enough that he can excuse himself from any blame but tepid enough to undermine the election goodies that Labour are already bandying about.

The starting gun on twenty wearisome months of campaigning has been fired!

Alastair Winter is the Chief Economist at Daniel Stewart & Co