The euro is lower this Monday morning but it’s all about politics, not economics. After a week in which it was – along with the GBP – one of the two winners in the foreign exchange market, EUR/USD has tumbled from a high just under 1.18 in Sydney to a low just under 1.1730 to open in London around 1.1737 with GBP/EUR 40 pips higher at 1.1250.
More than two months have passed since the German Federal Elections in September and Chancellor Angela Merkel’s attempts to create a four-party government failed last night when the pro-business Free Democrats walked out shortly before midnight after repeatedly clashing with the left-wing Greens.
A so-called Jamaica coalition (named after the four colours of the Caribbean island’s flag) had never been put together before but the narrowness of the election result meant it was the only way forward without bringing the right-wing AfD party into Government.
It appears the major stumbling block between the parties was on immigration, an issue that has overshadowed the past two years of Ms. Merkel’s CDU leadership following her decision to allow over a million asylum seekers into Germany. The Christian Social Union (CSU), which is the Bavarian sister party to the CDU, had demanded a cap of 200,000 on refugees allowed into Germany in a year, a demand that had proved unacceptable to the Greens.
The way forward from here is far from clear. It is possible that fresh elections will be held in the New Year, but Ms. Merkel may no longer be the head of the CDU at that time. For the moment, German politics will totally overshadow Eurozone economics even as ECB speakers this week will likely continue the upbeat messaging which comes from its President and Chief Economist.