Europe waits for German election results amid crisis

January 24th, 2013

As the new year begins, it seems that the markets are on the rise. Today, the European finance ministers met for the first time this year to discuss the debt crisis. And, as a result, the futures in the U.S. markets are up, and even the Yen has jumped up from its two-year low.

Germany’s 10-year bond yield rose four basis points, or 0.04 percentage point, to 1.59 percent. But, is this break in the economic crisis going to last long enough for growth? Doubtful.

According to CNBC, analysts have said, “The euro zone crisis will be on hold until Germany’s national elections in September.” Most likely in response to the loss, Chancellor Angela Merkel’s party suffered in the German regional elections this weekend.

On Sunday, Merkel’s conservative coalition lost regional elections in Lower Saxony, one of the country’s most populous states. But, overall things aren’t that bad for the German chancellor.

Merkel is still ahead in national polls, enjoying 65 percent support, according to a German polling agency. Support has remained strong, as voters have endorsed her handling of the euro zone debt crisis and Greece’s bailout.

So what does this mean for trading in the next eight months? Professor Paul de Grauwe, a professor at the London School of Economics, told CNBC that the economy’s performance has been lackluster because Merkel had pursued a balanced budget policy in order to lower debt.

This slow down in the largest European economy is not something the rest of Europe can handle at this time and will most likely cause problems in the long run.

“Economically, when you compare Germany and Chancellor Merkel to other countries, she is doing well. But it’s still a poor performance. The German economy had been growing negatively at the end of last year,, and it doesn’t look like it’s going to grow very fast in the coming months, so in terms of economic performance, it’s not that good,” said de Grauwe. Speculators are saying that if Germany’s economy doesn’t recover as elections loom, Merkel could be forced to change tact to stimulate growth and consumer spending. De Grauwe said that if the economy does not change “by September, then it might become a problem. If it doesn’t grow, I can see Merkel swallowing her pride about balancing the budget and trying to stimulate the economy again.” Germany has been the engine that keeps the euro zone moving in such a trying fiscal climate.

Merkel has long been at the center of euro zone talks and a large factor when trying to determine what financial policies to enact to keep the euro afloat. Many economies are depending on the results of the German election.

Information from CNBC was used in this report.