Euro Slips After German Election Tests Angela Merkel's Coalition Building Skills

Angela Merkel's hint that a new German government could take months to form has the euro on the back foot.

Author:: Martin Baccardax
Publish date:: Sep 24, 2017 5:28 PM EDT

The euro slipped in early Asia trading Sunday after Chancellor Angela Merkel won a smaller-than-expected victory in Germany's federal elections and indicated a new government may not be in place until Christmas.

Merkel's Christian Democrats (CDU) and their sister party, the Christian Socialists (CSU), polled at around 32.7% in the national vote, according to the first official projections, comfortably ahead of the 20.2% tally earned by their chief rival, the Social Democrats, led by former European Parliament President Martin Schulz.

However, both the CDU/CSU pairing, as well as the SDP, saw significant slippages in their overall vote share, with a major portion of those lost votes going to both the far-right Alternative for Deutschland Party and the Free Democratic Party.

"There's no need to mince words ... we wanted a better result," Merkel said at her party's headquarters in Berlin. "But it is now down to us to form a government and without us, no government can be formed."

The euro was marked 0.37% lower in early Asia trading and changing hands at 1.1901 against the U.S. dollar by 21:30 London time.

Schulz called the defeat "crushing" and said the SDP will abandon its previous coalition with the conservative CDU/CSU tie-up and sit in opposition in the German Bundestag.

That means Merkel has to reach out to a collection of smaller parties in order to form a workable government, which she indicated may not be in place until Christmas, in order to carry out her fourth term as Chancelllor.

If Merkel is to build a stable government in the 631 seat Bundestag, she will now likely need to put together a so-called "Jamaica Coalition" of the CDU/CSU (associated with the color black), the FDP (associated with the color yellow) and the Green party.

Collectively, the three groups could hold around 349 seats, based on current projections, comfortably ahead of the 316 needed to form a government.

The Green party's exit poll numbers were pegged at 9.4% while the economically conservative FDP looked to have gained 10.5%.

The far-right AfD party scored a big 8.7% gain, by far the largest of any party in the election, and won around 13.4% of the overall support, meaning they will gain seats in Parliament for the first time, although it is extremely unlikely that it will work with any mainstream party in a coalition government.

Merkel's task of forming a government could also be challenged by demands from both the Greens and the FDP, the former of which would likely seek cabinet positions on the economy and foreign policy while the latter is expected to ask for the coveted role of Finance Minister.

That could put Merkel in the sensitive position of sacking one of her closest political allies -- the venerable and popular Wolfgang Schaeuble -- in order to save her party from surrendering power.

However, Schaeuble's views on Europe, particularly with respect to budget transfers and member state bailouts, are far more closely aligned to the FDP's pre-election manifesto positions and, as such, could lead to a compromise between Merkel and party leader Christian Lindner.

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