Wolfgang Schäuble, Germany’s conservative finance minister, is set to be replaced by the more moderate Olaf Scholz, a Social Democrat, in the next administration, and analysts are pondering what this could do to the euro.
Germany’s two major parties, Chancellor Angela Merkel’s center-right Christian Democrats and the center-left Social Democrats, have been in marathon coalition negotiations, which finally yielded an agreement Wednesday.
Even though the Social Democrats still get to vote on the final plan, top posts in the next administration are being filled, including replacing the head of the Finance Ministry. Olaf Scholz will take over from the Christian Democrat Schäuble, who in turn will move on to become parliamentary president.
Scholz is not to be confused with Martin Schulz, previously the leader and chancellor candidate of the Social Democrats, who is now poised to become foreign minister.
While Scholz, a former Hamburg mayor, is called business-friendly and moderate by local media, Schäuble is known for his outspoken criticism of the European Central Bank’s quantitative-easing program and his fiscal conservatism. In October, Schäuble warned that the loose monetary policy of the European Centrak Bank and its peers had created too much debt globally and could cause the next global financial crisis, for example.
Scholz could be a much different finance minister, potentially marking a shift for the eurozone, European government bonds TMBMKDE-10Y, -1.30% and the euro EURUSD, +0.1714% itself.
“This may lead to a more expansive German fiscal policy and therefore faster growth—and higher interest rates—throughout Europe,” wrote Marshall Gittler, chief strategist at ACLS Global in a research note. This would further support the euro, which already has strengthened 2.1% against the dollar in 2018, as higher interest rates would push the shared currency upward.
At the same time, the European economy is set to expand without his help, with the ECB slowly but surely moving to normalize monetary policy and analysts expecting another good year for European assets. This could overshadow any potential euro-positive effects Scholz might bring about in the near term.
“It is true that he may not be as fiscally conservative as Schäuble, however the change may pertain more to local factors in Germany, and isn’t likely to have big implications for the euro,” said Sireen Harajli, a foreign-exchange strategist at Mizuho. Improving fundamentals across the eurozone will lead the ECB to end its asset-purchasing program by late 2018, and rate hikes will commence in 2019, she added.
“You can’t say it’s bad for the euro,” said Kit Juckes, chief foreign-exchange strategist for Société Générale, of the Scholz pick. “It’s either positive or has little effect.”
Over time, it might well prove positive for the shared currency, Juckes added, but in the near term it was unlikely that Germany fiscal policy would shift dramatically.
Social Democrats, whose party has seen a surge in applications throughout the negotiation process with the Christian Democrats, still have to vote on the coalition agreement with Merkel’s party, and a no vote would likely result in new elections.
Results are due on March 4, which is also election day in Italy.