Angela Merkel sails to reelection. How will markets react?
German Chancellor Angela Merkel received a ringing endorsement from the German people in elections on Sunday, which will remove one of the biggest question marks hanging over markets this year. However, the results leave Merkel's Christian Democrats just short of an overall majority and a protracted period of coalition building lies ahead.
According to official figures, Merkel, one of the key figures in the euro zone's economic crisis, was voted back in 311 seats and a bigger share of the vote than in 2009 -- 41.5 percent compared with 33.8 percent in four years ago. While Merkel's CDU captured the largest share of Sunday's vote, it will still have to negotiate -- most likely with the rival Social Democrats, who captured 25.7 percent of the votes, to form a "grand coalition" .
"All of this means that the Germans will very likely get the coalition they have been looking for," ING's Carsten Brzeski wrote in a note Monday morning. "Negotiations, however, will not be easy."
Germany, the euro zone's largest economy, has a great deal of influence in efforts to escape the currency region's ongoing economic woes. The country has been the biggest contributor to the bailout of peripheral economies like Greece, Ireland and Portugal.
"In our view, the biggest challenges for any new German government are to ensure that the economy remains the powerhouse of the euro zone and can keep its leading position in world markets," Brzeski wrote.
Market reaction was muted on Monday morning, with Germany's DAX index down 0.11 percent and the FTSE 100 of leading U.K. shares off by 0.3 percent. Meanwhile, on the currency markets, the euro was broadly flat against the dollar, 0.07 percent down at $1.3532.
The negative reaction could reflect concerns that the new coalition will mean a "move leftwards on issues such as bank transaction tax, minimum wage and tax rates for high earners," Alistair Newton, senior political analyst at Nomura, told CNBC.
Newton believes that Merkel may still need opposition support if some of her party members continue to rebel on euro zone issues, as they have in the past.
And, of course, the SPD still controls the upper house of parliament, the Bundesrat, so even if she controls the lower house, they could make themselves difficult at that level, Newton pointed out.
A strong showing for Merkel could mean that Germany is less likely to adapt a minimum wage across all industries, which could keep it more competitive, according to Jennifer McKeown, senior European economist at Capital Economics.
The Chancellor-elect has been one of the most pro-austerity voices in the euro zone's financial crisis -- and has taken a hard line on whether to adopt softer policies towards bailed-out nations like Greece.
Skeptics point out that it is in Germany's interest to support other countries in the euro zone. The currency union is only strong if it's intact and if a country such as Greece is forced to leave then investors would fear other larger economies such as Spain and Italy could also be in danger of default. An unstable euro zone would affect Germany's banks, who still hold some assets in the peripheral economies, plus some of Germany's biggest export partners are in the region.
—By CNBC's Catherine Boyle, additional reporting by Phill Tutt. Follow Catherine on Twitter:
