Back in June, what seems a very long time ago (but isn’t), we described the now notorious photograph of the four western leaders taken on OMAHA Beach at the Normandy D-Day commemorations: Biden, Scholz, Macron, and Cameron who was standing in for Sunak who had done a bunk to go and do an ITV election interview. Joe Biden used the opportunity to demonstrate the solidity, the strength and endurance of the relations between these cornerstone western allies and his fellow leaders in a period of immense geopolitical challenge.
And then there was one (and even he’s on rocky ground)
Fast forward not even six months. Biden: defenestrated and all but gone, his nominated successor roundly defeated; Scholz: his coalition has self-imploded and he is about to be gone; Sunak/Cameron: already ancient history; Macron: self-emasculated through his own choice to hold a snap election which has left him politically almost entirely isolated at home.
With (one hesitates to use the description ‘excitement of’) the US and UK elections out of the way attention now turns to the Continent. The death of the German government, an event which had been prematurely forecast on several occasions, has now finally come to pass. Meanwhile, in France, the equally premature death of Prime Minister Michel Barnier’s government is also viewed as a distinct possibility.
Germany: 23rd February and an unscheduled appointment with the electorate
The Germans now have an election date set for February 23rd. The only stand-out figure of any quality in the SPD (the Social Democrats which led the collapsed ‘Traffic Light Coalition’) who had any chance at all of leading the centre-left party to victory was the highly effective defence minister Boris Pistorius. Despite the almost unique distinction of a positive personal approval rating he has still opted out, giving full backing to the hapless Olav Scholz whose rating is off-the-scale bad. Realistically, the SPD is sunk from the standpoint of leading the next government. If the polls are correct then it will be a Christian Democrat CDU/CSU leadership with Friedrich Merz as Chancellor. The least likely outcome under Germany’s proportional representation system is that the CDU will have sufficient votes to form a one-party government. It will need coalition partners. The real question is to what extent it relies on them and who they will be.
What is likely to determine the outcome is the extent to which the CDU bends right to steal the ground from under the far-right, presenting its new position as the acceptable face of conservatism and minimising the more extreme future influence of the ‘Alternativ fur Deutschland’ party (AfD). Merz will have little difficulty putting blue water between himself and Angela Merkel, the most recent CDU Chancellor to hold office. Fairly or not, she is now widely discredited as the author of both Germany’s controversial liberal, open-door immigration policy and the country’s industrial decline having mortgaged the economy to the Kremlin with almost total reliance on Russian gas. The likelihood of an alliance with the right wing AfD is zero unless it is the only means remaining of forming a government when every other avenue has been exhausted. But nationalism also stalks the far left, capitalised upon and actively stoked by Sara Wagenknecht and her eponymous Marxist-Leninist BSW.
Even if Scholz’s SPD trails a weak second or even third (it will depend on the geographic spread of the votes and their concentration), it could still be the junior partner in a new coalition. However, a new centrist CDU/SPD coalition still must be wary of the significant momentum at the poles of the German political spectrum. However much the centrists abhor the hard left-and-right policies out at the poles, the new leadership will have to be sensitive to the underlying dissatisfaction with the establishment, even if many are still put off directly voting for the AfD and BSW.
The root problem any new government must address is Germany’s rising sense of national insecurity. Economic stagnation; industrial power and heritage being threatened by new technologies and Germany’s flat-footed response to adapt (do not underestimate the extent to which the very public travails of Volkswagen are a national humiliation and disaster); immigration; climate change policy; Ukraine. These are going to be the defining subjects which determine the outcome of this election, as well as the immense ideological struggle between German nationalism and liberalism. This election is every bit as important as the recent one in the US even if it lacks the excitement, the flag-waving whoopee-doo and that binary definition and intense focus on personalities the US election always has.
France: between a rock and a hard place
Meanwhile, it is hardly that all is well next door in France. President Macron’s new prime minister, Michel Barnier, is dancing on the head of a pin. No matter what a political bruiser he is (and we should know in the UK having been on the receiving end of his negotiating skills as the Brussels representative in the Brexit talks), his principal problem as a soldier of the very thin and insubstantial centre ground is that he has no political centre of gravity to support him. The power lies at the poles of the political spectrum: to the far left with a rag-tag-and-bobtail but substantial group of MPs under Jean-Luc Mélenchon and on the far right, the National Rally under Marine Le Pen. The one factor Barnier has in his favour is that beyond a shared hatred of Macron’s pension reform, the far left and the far right have virtually zero in common.
The immediate challenge for Barnier is to produce a budget which is politically acceptable to the electorate and which can survive its path through the French parliament, while being fiscally legal in Brussels. It means halving the current deficit to 3%, a very tall order. If the political maths fails to stack up in Barnier’s favour and he resorts to ramming a budget through under a statutory instrument which bypasses the French parliament (the same nuclear option employed by Macron to secure that very necessary but deeply unpopular pension reform), it will almost certainly trigger a vote of no confidence. It is a moot point as to whether his government will survive it. Into the political mix is the complication of Marine Le Pen’s corruption trial: if she is found guilty she will be disbarred as a Presidential candidate. Seeing how the indictments against Trump played out with accusations of the law being weaponised by the government for political purposes, this is politically charged.
How others see it
While all this might be interesting to those who enjoy the cut and thrust and excitement of politics, the wider consequences are relevant and important to all of us, not least as investors when assessing risk. How do others read what is encapsulated in that Normandy photo and what has unravelled very quickly since? Moscow, Beijing, Tehran and Pyongyang must be looking on in wonderment as the political sands in the West shift under their own weight of instability and unpredictability. As we approach the third anniversary of Putin’s invasion of Ukraine, with Trump in the White House and European electorates becoming perceptibly less sympathetic to supporting President Zelensky unconditionally, there is a sense that 2025 could see a change in direction. It is impossible to predict accurately what will happen or what the long-term consequences will be but it makes assessing potential risk even more difficult. The temptation is to adopt the ostrich strategy of burying your head in the sand; however appealing it does not make the problem go away, it simply hides it from view.
As we have said many times before, most investors’ comfort zone is confined to what they can quantify, count and place a value on. Hence the microscopic and forensic dissection of economic data and statistics. The less visible, difficult, but no less important angles of weighing up political and geopolitical risk find their barometers in the melting-pot of appropriate term and risk premiums or discounts in bonds and volatility in exchange rates. However challenging, it still matters.
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