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European espresso: Post-election reforms could re-energise a stagnating Germany

As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Manager Robert Schramm-Fuchs considers the prospect of structural reforms in Germany, after the collapse of the coalition government.

Robert Schramm-Fuchs

Robert Schramm-Fuchs

Portfolio Manager


Nov 13, 2024
3 minute watch

Key takeaways:

  • New elections are on the horizon for Germany, after the coalition government under Chancellor Scholz broke apart last week.
  • Germany has been in permanent stagnation for close to three years, made worse by the European energy crisis, a legacy of two decades of limited structural reform.
  • The election of a reform-focused government; prioritising an easing of bureaucracy and a more simplified tax structure, could help to re-energise Germany as the engine at the heart of Europe.

I wanted to give our opinions on the German elections. You will have seen last week the German government coalition broke apart and it appears that there is now an agreement that new elections will be held on 23 February. Preceding that, there will be a vote of no confidence in the current Chancellor and the current government over the coming weeks.

Now what does it mean for equity markets? We think it is actually good news, the reason being that Germany has been in permanent stagnation for the past two-and-a-half to three years. Since the European energy crisis erupted, it has made it worse. But the underlying issues go back much longer.

Germany had its last set of structural reforms back in 2003 and 2004. What they called ‘Agenda 2010’, under Chancellor Schröder at the time. Now the governments after that, the Merkel years, and now the recent period under Chancellor Scholz, have essentially lived off that reform agenda of 20 years ago, and diluted it over time. And so Germany’s competitive position and labour productivity, and so on, became worse and worse. Germany became the sick man of Europe again, like it was in the 1990s.

The good news is that the leading candidate, according to the polls in the elections the Conservative Friedrich Merz has a proper reform agenda. Now the details will get published over the coming weeks. But he promises to be the candidate of significant easing of bureaucracy and a significant easing of the tax code as well. So sort of a mini-Trump, if you will, in terms of deregulation, de-bureaucratisation; and general ease of doing business, and ease of costs associated with doing business.

That is good news for the stock market. Now we have already had the MSCI Germany [Index] relative to the rest of Europe come off its multi-year lows, back at the beginning of this year. But there is much more to go for. We feel the election could be a good trigger for more of that underperformance of recent years to be made back, and Germany could become the locomotive again that Europe so desperately needs, as opposed to the sick man at the core of western Europe.

 

Please note: Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. There is no guarantee that past trends will continue, or forecasts will be realised.

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

There is no guarantee that past trends will continue, or forecasts will be realised.

 

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Robert Schramm-Fuchs

Robert Schramm-Fuchs

Portfolio Manager


Nov 13, 2024
3 minute watch

Key takeaways:

  • New elections are on the horizon for Germany, after the coalition government under Chancellor Scholz broke apart last week.
  • Germany has been in permanent stagnation for close to three years, made worse by the European energy crisis, a legacy of two decades of limited structural reform.
  • The election of a reform-focused government; prioritising an easing of bureaucracy and a more simplified tax structure, could help to re-energise Germany as the engine at the heart of Europe.