German election Sunday could mark peak for euro

09/19/2013 7:07 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Yes, Virginia, there is potentially market-moving news from someplace other than Washington D.C.

German voters go to the polls on September 22.

If this were a U.S.-style Presidential election Chancellor Angela Merkel would win in a walk. Her personal approval rating stands at 65%. And her Christian Democratic Union party leads its biggest and nearest rival by 15 percentage points.

But this is a parliamentary election. And while Merkel will easily win reelection to her seat and while the CDU (plus its Bavarian sister party the Christian Social Union) is likely to take at least 40% of the vote, there’s a good chance that Merkel won’t win enough seats to form anything other than a coalition government. With the Free Democratic Party, a partner in Merkel’s current coalition government, looking unlikely to win the 5% of the national vote that’s required to gain any seats in the Bundestag, the shape of that coalition could get pretty strange with the most likely odd-bed follows being Merkel’s CDU and the opposition Social Democratic Party.

Whether that coalition—or any coalition--will be able muster the consensus needed to meet EuroZone challenges is likely to get a quick test too. Greece, despite progress toward producing a primary budget surplus (that is a budget surplus not counting interest on the national debt) looks like it’s going to need either a small bridge loan or a big bridge loan and debt reduction in late 2013 or early 2014. Portugal looms as an even bigger problem with the country needing to raise $15.8 billion euros ($21.4 billion.) It’s almost impossible for the country to raise that much in the bond markets meaning that Portugal will almost certainty need a second full bailout program at the end of 2013 or in early 2014.

Quite a set of challenges for a Chancellor who has run a campaign sort-of-promising, wink-wink that German taxpayers won’t have to pony up big money for more bailouts in 2013 or 2014 or 2015

And the bailouts aren’t the only challenge in the EuroZone that Merkel will face post-election and maybe not even the biggest. The battle over creating a European banking union was put aside for the German elections but it will go back on the fire almost immediately after the vote. Merkel opposes the kind of strong union supported by the European Central Bank and the European Commission without changes to fundamental treaties. Getting those treaties amended and then approved by national parliaments would be a horrendous task—but failing to get a stronger banking union passed in 2014 would be a huge failure.

The euro has rallied to $1.3531 as of the close on September 19. That’s near levels where the currency has run into resistance. I wouldn’t be surprised if the German election proved to be the high point for the euro in this market cycle.

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