The Germany election could be good for the euro but it’s too early to say

The groundwork is being laid by European leaders to shift towards larger deficit spending. Yesterday, German Chancellor Scholz signalled a plan to have an election based on removing the fiscal break and elsewhere, politicians aren’t shifting back to pre-covid norms.

There is pushback though as ECB chief economist Phil Lane made a presentation today warning on sovereign debt risks, though also argued that could be mitigated by tighter integration and joint issuance.

Deutsche Bank today looks at the potential German election and says it could be positive for the euro but that it’s too early to price in as there is too much uncertainty.

• Election likely in late Feb or March
• New government unlikely before spring, creating uncertainty during crucial US election period
• CDU which is likely to lead the next coalition
  is campaigning on a platform of maintaining the current fiscal stance. Scholz represents the SPD.
• Defense spending boost would benefit US more than German economy
• Possible infrastructure fund needs two-thirds majority – not guaranteed
• Even with German fiscal space, France/Italy constraints limit broader Eurozone stimulus
• EUR/USD impact limited near-term given uncertainties

Deutsche Bank lowered its EUR/USD year-end forecast to 1.05 after the US election.

This article was written by Adam Button at www.forexlive.com.