News:German Right Unified as CDU Recieves Record Total on Collapse of FDP

Germany's center right government, composed of the Christian Democratic Union and its sister party the Bavarian Christian Social Union, came close to securing an absolute majority in Bundestag in elections this Sunday.  Together, the two parties received 42 percent of the vote, up sharply from the 33 percent the duo garnered in 2009 federal elections.  Results for the main opposition party were largely disappointing, but    the Social Democratic Party, or SDP, got 25 percent of votes cast, up slightly from the 23 percent the party received in 2009.  While Ms. Merkel addressed ecstatic supporters Sunday night declaring "we did great," reality set in later in the night as in became clear that the rise in the CDU's vote total came largely as a result of an implosion of the Free Democrats, Germany's other right wing party which usually gets around ten percent of the vote. Support for the pro-business Free Democrats plunged from 14 percent in 2009 to a meager 4.7 percent in 2013, below the required five percent threshold to win seats in parliament.  Other minor parties faired a bit worse than four years ago.  Collectively the Greens and the Left, two minor leftist parties, received only 16.9 percent of the vote, compared to the near 23 percent these parties siphoned away from the more mainline parties in 2009.  The anti-Euro Alternative for Germany also failed to break above the five percent threshold.  

It appears unlikely that the CDU will win an absolute majority in the Bundestag.  Therefore, with the Free Democrats out of parliament, Ms. Merkel may be forced to form another "Grand Coalition" with the Social Democrats.  Such a partnership governed Germany from 2005 to 2009.   The CDU had governed with the Free Democrats since 2009, avoiding a costly alliance with the left which greatly curtailed Merkel's agenda when they were full coalition partners from 2005 to 2009.  

On FX, markets were mute to the election results, as participants were widely expecting a CDU victory.  On the other hand, if Merkel does indeed fall shy of an absolute majority, she will face tougher choices on coalition partners since all of the minor right wing parties have been voted out of office.  Markets have been calmed by the Merkel 'victory' but it is not clear at all that the prospect of a CDU-SDP coalition has been fully digested, especially since most English language news outlets are reporting a CDU landslide.  A more accurate characterization would be a coalescence of the German right around a single party, but a failure of the new unified movement to produce a parliamentary majority.  The silver lining the SDP is that it will a major player in the formation of the next German government.  Markets are calm for now, but prolonged coalition negotiations could inject some short-term volatility.