With the upcoming German elections taking place in the last week of September, the political and financial landscape in Germany and Europe might experience some uncertainty or volatility. Often, before and after an election, the currency might weaken or strengthen, according to market expectations or surprising electoral results. 

It is expected that Angela Merkel’s Christian Democratic Union (CDU) party and its Bavarian counterpart, the Christian Social Union (CSU), will be the largest party which will win the most seats in the German Parliament, the Bundestag. Since the 2013 election, the CDU/CSU has been usually ahead of the Social Democratic Party in opinion polls. What remains unclear is whether she would form a coalition with the Social Democratic Party of Germany (SPD), the Alliance 90/Greens (often called Greens), or the Free Democratic Party (FDP). The uncertainty regarding possible coalitions might have a minor effect on the Euro.

This will be the fourth consecutive win for Merkel’s CDU. In second place, it is predicted that it will be the Social Democratic Party of Germany (SPD), the former President of the European Parliament Martin Schulz’s party, which, along with the CDU, are currently the two major political parties in Germany. The SPD was established in 1863 and is the oldest existing party in the German Parliament. 

Opinion polls

August is the final month of campaigning and polls show that the German Chancellor Angela Merkel and her CDU are leading the polls. It is said that, although she is doing well, her approval rate had recently dropped by 10 points to 59%, according to a Deutschland Trend poll by ARD. The poll reflects opinion about the way she handled the emission talks with the car industry bosses, preferring instead to go on holiday rather than chairing the sessions. Gerhard Schroeder, former Chancellor, said: "I don't want to spoil anyone's holiday. But here I would have taken charge personally. It is all far too important.” In order to gain support, Merkel acknowledged that Germany needs to ban diesel cars.

Another poll, the latest Emnid poll for Sunday Bill am Sonntag newspaper, shows that Merkel is 16 points ahead of the SPD, with 38% against the SPD’s 24%.

Despite coming second, Schulz believes he still has “a good chance” to win the election. 

The far-right, anti-immigration party Alternative for Germany (AfD) is at 8%, the far-left Left party at 10% and the Greens at 7%.

While, in 2016, the far-right AfD enjoyed popularity due to the general anti-European and anti-immigration sentiment gaining momentum in Europe, it has now lost its status.

How does the German electoral system work?

The German elections will be held on 24 September 2017 to elect the members of the 19th Bundestag, who will then elect the new Chancellor to form a new government. 

Germany has a proportional representation which means that whatever percentage a political party gets this will reflect the percentage of seats it has won. Being a parliamentary democracy, in which parties play a significant role, and also allowing voters to choose their local candidates, Germany’s voting system is considered very complicated. Simply, because not everyone in Germany will cast both of their votes for the same party.

And this is because every person votes twice. The first vote allows electors to choose their district’s candidate. The second vote is for the party of their choice. A candidate who wins in one of the 299 districts during the first vote secures a parliamentary seat. The German Parliament has a total of 598 seats: the first votes decide the 299 district candidates, and the remaining 299 seats are allocated according to the percentage of the vote received by the voters’ second votes. Since the second vote is for the party, parties will have to get more than a 5% to be able to send their representatives to the parliament. This percentage based on the second-vote counting will be released on election night and will shape the general power structure in the parliament. 

While those candidates who won a seat based on the first vote receive a “direct mandate,” the ones that gain a seat as a result of the second vote and their party’s percentage, will be picked by each party’s candidate lists. Each party has a state by state list, and depending on the state’s size and each party’s results in each State, candidates will be chosen accordingly. 

In a less complicated manner, the winners in Germany’s voting system are simply those candidates who win based on first votes and those parties which get a high percentage from second votes. The first votes decide which candidate will win a particular district election and is immediately guaranteed a place in the parliament. The candidate’s party might fail to pass the 5% threshold, but still have a representative in the parliament. However, if such a party doesn’t have more than 5%, but manages to win at least three districts during the first votes, then the party is granted extra seats according to the percentage of the vote.

Will the German elections affect the Euro?

Every currency responds accordingly to political and unexpected events. For example, the Euro dropped against the Pound and the US Dollar before the French elections, and rose after neoliberal Macron’s victory.

While, for Germany, Merkel’s victory is clear, the kind of coalition she will need to form is not, and this might create some volatility, both in terms of currency movements, but also of politics, relating to the EU and possible reforms. Needing to secure a majority, Merkel will have to form a coalition deal with one or more of the opposition parties. A possible coalition between the CDU/CSU, the Free Democratic Party (FDP) and the Greens, also known as the “Jamaica” coalition due to the combination of the parties’ colours, will work to balance liberal views with business policies. While such a coalition will encourage business and growth, the FDP would want each Eurozone country to be more responsible and, in general, the coalition would not support a deeper European integration. This might affect both the currency and EU politics.

Another coalition, between the CDU/CSU and Schulz’s SPD might result in increased European integration which means that Germany will no longer be the defacto head of the EU, since Schulz wants all member states to be on an equal footing. This might strengthen the EU and boost the Euro.

With all the worries about the fragmentation of the EU gone, and Macron’s win, Merkel’s possible victory in the upcoming German elections is expected to strengthen the bloc and the Euro itself. The potential coalitions might create minor uncertainty, but, in general it appears that the elections will be relatively uneventful.