The German federal elections on September 22 could be of enormous consequence for Greek solvency – and the future of the eurozone. Today’s Geo-Graphic shows that Greek solvency may itself be of great consequence to the German elections.
As the figure shows, when the yield spread between German and Greek government bonds falls (and market optimism for Greek solvency rises), support for the small right-of-center, free-market German FDP party rises. (The FDP is currently part of the Merkel-headed, CDU-led government.) When that spread rises, however, support for the FDP falls, while support for the left-of-center SPD party rises. (Support for Merkel’s CDU is invariant to shifts in Greek sentiment.) Read more »