Macroscope | Never mind Trump, Merkel’s exit is the big political risk

For the next two months, all eyes will be on the US presidential election.

While Hillary Clinton, the candidate of the Democratic Party, is expected to win the contest, which takes place on November 8, her Republican opponent, the unabashedly populist Donald Trump, is only six points behind his adversary and could still win the election.

Yet while US politics will dominate the headlines for the next 10 weeks, investors would be well advised to pay close attention to the other big political risk hanging over financial markets: the possibility that Angela Merkel, Germany’s long-serving chancellor and the most powerful figure in European politics, may decide to step down ahead of a crucial parliamentary election in autumn 2017.

On Sunday, Merkel’s party, the ruling Christian Democratic Union, is expected to perform poorly in a closely watched regional election in the chancellor’s home state of Mecklenburg-Vorpommern.

The CDU’s woes stem entirely from Merkel’s highly controversial decision last year to throw open Germany’s borders to more than a million mainly Muslim refugees and subsequently fail to push through an equally contentious plan to make each country in the European Union take a quota of the migrants.

A fierce domestic backlash against Merkel’s open-door refugee policy has been fuelled by two terror attacks in Germany this summer, both of which were carried out by refugees linked to the Islamic State militant group.