In what is a surprising warning shot for Merkel's popularity ahead of the September general election in Germany, moments ago the CDU/FDP ruling coalition lost the vote in Lower Saxony to the center-left Social Democratic Party/Greens block by a last minute, one-seat win according to Reuters. The SPD and Greens won a combined 46.3 percent against 45.9 percent for the centre-right, with the FDP defying predictions they would fail to win a seat and scoring 9.9 percent - twice what they had been forecast to get, however the boost coming as a result of a CDU ballot-splitting strategy that may have now backfired.
Here is how Deutsche Bank described the significance of this regional election previously:
The outcome of the Lower Saxony election in Germany on 20 January could tell the market something about the popularity of the FDP party and the likelihood for a continuation of the CDU-FDP coalition at the Federal election later this year.
With the federal elections in September, the election in Lower Saxony ought to offer the market some insight into political support, in particular for the FDP/Liberals, the junior coalition partner to Merkel’s conservative CDU/CSU. On federal level, the Liberals have been faring badly in polls at or below the 5% threshold since March 2011. Unless they improve their lot or conservative voters tactically vote for the Liberals to ensure their representation in parliament, they might not enter the next Bundestag. An important milestone is the state election in late January in Lower Saxony, home state of the current Liberal party chairman and minister of the economy, Philipp Rösler. After months of trailing behind in the opinion polls. The currently governing centre-right coalition headed by David McAllister has been closing the gap. The odds are absolutely even - essentially because the FDP should be able to remain in parliament. In the case of a victory of a SPD/Green coalition led by Stephan Weil (SPD) a reshuffle in the leadership of the Liberal party is likely with long-serving (and excellent campaigner) Rainer Brüderle replacing Rösler as party leader.
Spiegel is already out with the post-mortem:
Chancellor Angela Merkel and her Social Democrat challenger in the September election, Peer Steinbrück, both wanted a boost from Sunday's state vote in Lower Saxony. But it was so close that neither got what they were hoping for. If anything, the result shows that despite Merkel's popularity, her bid for a third term could be a very tight race.
The election in Germany's fourth-largest state is being scrutinized for clues to the outcome of the September vote in which Merkel is bidding for a third term.
Whoever ends up as the winner when all the votes are counted in Lower Saxony, the main lesson is likely to be that the general election could be a very tight race indeed, despite Merkel's popularity.
The chancellor has won kudos for limiting the fallout of the euro crisis for German taxpayers, and many analysts have said she looks almost unbeatable. She is a shrewd tactician with a knack for sidelining rivals, and she makes up for her lack of charisma and oratory skills with a low-key pragmatism that appeals to many voters.
But the weakness of the FDP is her Achilles Heel, and Sunday's election made that clear even though the ailing party appeared to come back from the dead, scoring an impressive and far higher-than-expected result of more than 9 percent. That gain was attributed to the CDU governor of the state, half-Scot David McAllister, who tacitly encouraged his supporters to split their ballot to make sure the FDP would clear the 5-percent hurdle needed to remain in parliament -- a precondition for him remaining in office.
That strategy appears to have worked a little too well, because it came at the cost of a steep drop in the CDU's own vote to just over 36 percent, down some six percent from the last election. Some 101,000 CDU voters opted to vote for the FDP this time, polling institute Infratest dimap estimated.
"The center-right camp can't really be pleased, the chancellor will have registered how dangerous a ballot-splitting campaign can be for her and the center-right," the chief political correspondent of the ARD public broadcasting network, Ulrich Deppendorf, said in a commentary. "The general election may be more exciting than expected."
While the impact of one-time regional election should not be exaggerated, what is certain to make the September election far more exciting is if the ongoing strength in the EUR persists, as countrary to all central bank logic the ECB does everything it can to strengthen not weaken the European currency. The immediate result of this strategy is to make German exports even less competitive outside of Europe (inside it already prefunds all current account imbalances via Buba funded TARGET2 claims), pushing the trade balance lower, and pressuring GDP.
As a reminder, Germany already posted its first quarter of sub zero GDP, a development which many would have said was impossible as recently as 6 months ago. At this pace the German technical recession of two negative GDP quarters, is virtually assured.
And while the people have been quite patient with Merkel's European policies so far, the main reason for their stoicism is that Germany has explicitly benefited from the Periphery being constantly on the edge, from the relative weakness in the EURUSD over the past three years, and from the capital reallocation into the core. Ironically, the end of even the brief, illusory period of peak crisis in Europe will have one major loser - Germany, which as we have said ever since the summer of 2011 benefits the most from keeping the Eurozone one step away from the grave.
Should the unemployment rate spike, should German GDP take another turn for the worse, and should German wages decline, one can be certain that then, and only then, will the "general election be more exciting than expected."
With eight more months of excitement build up, in which many things can and certainly will go wrong - after all this is Europe - don't count any chickens yet.