Political winds change for Germany

Political stability has been a major selling point for German-origin bonds in recent times, as the country has been one of the most predictable in the developed world. The political currents for Germany may be changing, though – at home and abroad.

DAVISON The German political environment has been one of the most stable in Europe. However, there is more uncertainty after the most recent election. How much does the political background play into the market and debt-issuance outlook?

VOLK I don’t see a risk of political uncertainty. First, the federal structure is there to support democracy. Usually, new opposition parties first appear in federal-state elections and indicate that other parties miss something. Being able to elect in federal states and in the federation means there’s a vertical distribution of power – which is supportive of democracy.

The current uncertainty is only because Angela Merkel has been struggling a bit to secure a fourth term – which is an unusually long time anyway. She’s only the third German chancellor to enter a fourth term. So I wouldn’t see this as a worrying uncertainty.

There was a lot of noise because the first coalition talks between the Christian Democrats (CDU/CSU), Green Party and Free Democratic Party collapsed but I don’t see this as a sign of instability or uncertainty. If anything, it was a sign of strength, confirming that there are political parties with different programmes and at least one was not willing to subscribe to a fourth term for Merkel at any price. As we have seen now with the new coalition between CDU/CSU and Social Democratic Party, there were indeed other options.

DAVISON What about the external political situation? It’s obviously very early days but it seems Donald Trump’s return to protectionism in the US is aimed primarily at China and Europe. How that might this affect the European economic and debt outlook?

VOLK I cannot help noticing that the public discussion is one-sided. Hans-Werner Sinn, former head of the IFO Institute, criticised the EU for threatening the US with new tariffs regarding the US tariffs on steel imports. Sinn highlighted that the EU has high tariffs on various products, for example agricultural, making it impossible for foreign companies to compete with EU products.

Sinn also highlighted that, given elevated EU regulation in most areas, the EU applies plenty of non-tariff impediments for global trading and these are at least partly targeted to protect EU products. Sinn argued that the EU should reduce its tariffs and non-tariff trading impediments instead of threatening the US with further tariffs. Overall, just taking a look at the current account balance: the EU has much more to lose.

BEUER We have these discussions with investors and our counterparties. While it may sound negative, I don’t think these tariffs Trump is trying to introduce will influence all our trading relationships. We have really strong trading relationships all over the world, so I don’t think the US actions will affect growth and economic figures.

LAUTENSCHLÄGER Baden-Württemberg has a bit more than 12 per cent of its exports going to the US. But why are US citizens buying German cars? It’s not for price – it’s for quality. This will always be the case, whatever the tariff difference each country charges for imports.

I am convinced that due to the quality of the German product and the inability of US industry to deliver this kind of quality, in the end the US consumer will have to pay for it. In this case, the tax cut for an average person in the US will be washed away due to the higher prices they have to live with.

I do see Trump’s point in that there is a difference in tariffs for German cars exported to the US compared with US cars exported into Germany. But there has never really been a need to negotiate around this due to the difference in quality.

DAVISON What is the outlook for the European Central Bank (ECB) especially around the transition of leadership? How locked in is monetary tightening?

VOLK Just taking a look at the large holdings of the ECB already – for example, 45 per cent of public-sector purchase programme (PSPP)-eligible bonds and likely more than 30 per cent of PSPP-eligible German agency bonds – there seems a strong argument for the ECB to end net asset purchases soon.

Our expectation is that net purchases will stop in 2018. The next question is when the ECB will reduce its balance sheet. I’m pretty sure this won’t start any time before 2020 and likely even later.
At Deutsche Bank, we expect the first rate rise in mid-2019 but all the recent comments suggest a lot of gradualism with regard to rate hikes.

There has been a lot of talk, but not much clarity so far, about who the next ECB president will be. It’s generally accepted that if it is Jens Weidmann we can expect him to be more hawkish than Mario Draghi. However, it seems likely that CPI inflation on a euro area level would also remain in focus for the ECB Governing Council under a Weidmann presidency.