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Less European Uncertainty

09/23/2013

Missing another bullet, the stock market is relieved that Angela Merkel’s political party did slightly better than expected in the German elections, maintaining a steady hand at the top for another four years.  If she had been repudiated by the German voters, the market would be suffering badly today.

The only hiccup is that her coalition partner was repudiated, meaning Merkel will have to rebuild her coalition.  This shouldn’t take more than a month, but it is now safe to assume the primary savior of the Euro will become the primary savior of Europe.

There is a famous line in J.R.R. Tolkien’s Hobbit trilogy that “there will be one ring to rule them all.”  A recent cover of prestigious magazine The Economist shows Merkel standing on a lone pedestal column with the title “there will be one women to rule them all.”  Merkel is now the de facto leader of all continental Europe.  She is the most powerful woman on Earth!

Short-term, this means it is likely that she will continue to bail out southern Europe with the resources of Germany.  (Be thankful!)  Long-term, it will be interesting if any leader of a strong economy, who enforces austerity on other nations, can begin the unpopular process of enforcing austerity on her own country.

Unemployment in Germany is now at a two-decade low.  Enjoying a juicy level of expensive entitlements that only a strong economy can afford, it will be interesting to see how Germany sustains those entitlements with an aging population that is actually decreasing in size, a result of a low birth rate and lack of immigration.  If Merkel wants to build a legacy, she will have both to save Europe and to bring austerity to Germany.

For the present, investors should just thank the voters of Germany for “saving” Europe by saving Merkel.

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