Annegret Kramp-Karrenbauer who? More important than you may think

Henry Kissinger famously said “If I want to speak to Europe who do I call?”. That question has never really been answered, and although it could be argued for a long time that person was Angela Merkel, it is now not her immediate successor Annegret Kramp-Karrenbauer since she announced she would not be seeking reelection as leader of the CDU.

“AKK” may not be very well known outside Germany. However, as Angela Merkel’s chosen successor for leadership in the CDU, her presence was a lynchpin of stability for markets. The selection was formalised a little more than a year ago. One staple for financial markets in the past few years has been the assurance of Ms. Merkel’s authoritive hand on European politics. The Euro, a currency with significant design flaws, is held together by sheer political will. The choice, especially of a less flexible Merkel successor has always been an unacknowledged risk for markets.

The possibility of German political turmoil comes at an inopportune moment:

 I) German economy is teetering at the edge of a recession.

II) Donald Trump, free from impeachment, is gearing up for a trade spat with Europe.

III) Brexit is a further disruption to Europe – the resignation could affect negotiations.

IV) Euro-sceptics are on the rise.

I’m not sure how, or if this will affect markets on the first instance. But it is a development to be watched carefully, as it increases the risk of further disruption from Europe, a key systemic risk for the cycle.

David Baker, CIO and George Lagarias, Chief Economist