Although Angela Merkel's CDU/CSU party won a historic victory in the German elections, the European Union (EU) is still on hold as it awaits the formation of the final government coalition before once again moving forward on EU integration, particularly in terms of the banking union.
Many EU issues were put on hold awaiting the outcome of the German elections held on September 22nd. Pending a unified decision are such topics as a possible third bailout for Greece, more financial assistance to help get Portugal's access to market financing back and, most importantly for the markets, moving forward on the EU-wide banking union meant to deal with financial sector regulation and as a means to avoid future financial crisis.
In this context, the political situation in Germany threw a wrench in the works that hasn't been resolved despite Merkel's resounding victory, because the incumbent Chancellor did not manage to grab an absolute majority. Merkel is currently working on the creation of a coalition, with most experts expecting the likely outcome to be the so-called "grand coalition" between the CDU and the social democrats´ SPD.
There is talk that the CDU could move forward on governing alone due to some doubts as to whether SPD might balk at renewing a 2005-2009 coalition that seriously damaged the party's popularity. Speculation on the other possibility of Merkel joining up with the Greens seemed to have been ruled out as the Chancellor's sister-party CSU leader Horst Seehofer clearly stated that he refused to discuss the possibility, while Greens' chief Renate Künast said he couldn't imagine finding "common ground".
In any case, swift progress is not expected to be made and it should be pointed out that it took two months of bargaining in 2005 before a coalition was finally formed. More to the point for markets, both SPD and the Greens supported Merkel on all Eurozone crisis votes in the German Parliament.
"If it drags on, we would have some marginal weakening of the euro and a marginal widening of the spreads in the periphery," commented analysts from BNP Paribas prior to the elections. "But these are probably only short-term issues because the agenda is already set," they said, referring to the fact that, whatever the final outcome of the government framework in Germany, Berlin will continue to push forward on its already-established pro-euro stance.
UniCredit agreed with this point of view, stating that it could even be the case that the new government is "more constructive on Europe than before", something the Italian broker said would "enable further much needed progress in European integration".
In the meantime, and whilst markets await that final outcome, in whatever form, this matter continues to be the cog in the wheel for any advance in the financial sector regulation meant to prevent the collapse of banks such as those that forced the likes of Ireland, Spain and Cyprus to request bailout packages.
With discussions on hold in Germany at least until SPD holds a party meeting on Friday, to begin discussing their strategy for coalition talks, it seems unlikely that a final agreement will be nailed down by the time of the mid-October meeting of finance ministers.
"What matters is the November meeting when real haggling will be done," a diplomat involved in banking union negotiations told Financial Times. "If there is no German coalition by then, or the minister has a matter of days to prepare, we could be in trouble," he said.