German Political Impasse Roils Euro… Briefly

News that the attempt to forge a four-party coalition in Germany collapsed Sunday saw the euro marked down in early Asian activity.  The euro fell to nearly $1.1720 in the immediate response to the news, stabilized before turning higher in early European turnover. It quickly recovered and poked through $1.1800. The pre-weekend high was seen near $1.1820.

It is not clear where Germany goes from here. However, the important takeaway is that investors do not see this as a systemic issue, but a local one. Investors quickly looked past Catalonia’s secessionist push on similar grounds. Likewise, state developments in the US rarely move the markets, even large states, like New York and California. Nevertheless, we suspect the euro’s recovery has run its course, and the intra-day technicals warn of the risk of a new setback to the lows. 

Still, there are several options available to Germany. More compromises by the CDU/CSU and Greens to win back the FDP.  The CSU/CDU could try to woo the SPD, which has thus far refused to be part of a Grand Coalition again. The CSU/CDU and Greens could form a minority government, which the FDP says they would support. The German President could reject a minority government and insist on new elections.

In the US, the struggle over tax reform continues.  Surveys suggest the tax reform is unpopular.  The Joint Committee on Taxation (Congress) estimated that under the Senate plan 65% of American households would experience higher taxes while 24% would get a tax cut. Given that the cyclical expansion remains intact, and if anything, it has accelerated, we suspect that public investment (infrastructure) is a greater priority than tax relief.

Corporate tax schedules are misleading as the effective tax rate is considerably lower. According to a US Treasury report from last year, the average tax rate paid on profits of new investment in the US was 24%, in contrast to the 35% tax schedule. Businesses in other G7 countries paid an average of 21% (weighted by the size of the respective economies). 

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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