Under the Radar – German Coalition Collapses

What does this mean for the crypto market?

Crypto Headlines at a Glance

1. El Salvador’s experiment with BTC seems to be paying off as its holdings rise about $500 million
   
2. BTC reached new records this week hitting $93,000 USD on Wednesday
   
3. Dogecoin experiences 48% price jump in 24 hours
   
4. European Banking Authority introduced new guidelines for PSPs and CASPs
   
5. XPR traded above 82 cents in the early trading hours
   

German Coalition Collapses

With the US presidential elections taking centre stage, it is little wonder the collapse of the German government has received scant attention in the press. Striking similarities with Japanese politics, news on Europe’s largest economy fails to make much impact on the front covers of Britain’s newspapers. However, the news out of Berlin should concern crypto advocates, policymakers and economists across Europe and North America. 

German Chancellor, Olaf Scholz, and his so-called ‘traffic light’ coalition are under scrutiny as Scholz was forced to sack his finance minister, Christian Linder, following his rejection of the 2025 budget proposal. The coalition, made up of Scholz’s Social Democrat Party, the Free Democratic Party, and the Greens was already fragile. Following Linder’s departure that fragility finally cracked and calls began mounting on Scholz to face a confidence vote. Political instability and market volatility are intrinsically linked. 

The embattled Chancellor planned to hold the confidence vote in January of next year. However, the leader of Germany’s opposition party, Friedrich Merz, called on the Chancellor to face the vote before Christmas. Following further negotiations it was decided Scholz will face the confidence vote on December 16th with snap elections to be held on February 23rd 2025. With conflict and instability causing uncertainty across Europe, German strength will be key for the markets and for wider cohesion. This article will outline how integral Germany is to maintaining stability in Europe and beyond and how political instability may affect the markets, with a specific focus on crypto. 

The Trump Effect

So how did we get here? With Donald Trump returning to the White House, German politicians are concerned that his ‘America First’ agenda will leave Germany bereft of one of its closest allies at a time of geopolitical upheaval. Regarded as a pillar of European stability, Berlin has taken centre stage in managing the European Union’s response to the war in Ukraine. To balance its commitment to European stability, Scholz has stated his desire for Germany to expand its defence budget. This will include a significant expansion of the German Bundeswehr and aid to Kyiv. Following Trump’s success at the ballot box, Scholz proposed his government should send further financial support packages to Ukraine but in order to preserve pension and welfare payments, Scholz suggested the suspension of Germany’s debt brake. The suspension of the debt brake, which limits the state’s deficit, would allow Germany to borrow money to finance its Ukraine payments. This was a step too far for Linder who rejected the suspension and the coalition collapsed. 

With war raging unabated in Europe, German leadership is key in fostering a peaceful resolution to the conflict and maintaining economic stability throughout the Eurozone. According to the Kiel Institute for the World Economy, Germany is the second largest supplier of aid to Kyiv, estimated at €15.088bn. Away from aid donations, Scholz’s 2025 budget aimed to increase defence expenditure in response to the war in Ukraine. For years, Germany’s defence budget has sat below the non-binding 2% of GDP target set by NATO. In 2024, it finally hit 2%, with further increases likely. The defence increases were costed, after lengthy negotiations, in the budget. The process of reversing years of negligence is likely to take decades though. Moreover, given Germany’s historical approach to defence, such an increase is a departure from its longstanding aversion to militarisation. Alongside an increase in defence spending, Germany has reinstated national service. National service will be selective on ability and motivation, but provides a stark reminder of the unrest felt in European capitals. 

That Scholz will not win the confidence vote is a given. He now presides over a minority party in the Bundestag supported by his coalition partners, the Greens.  

Although Scholz would have wanted to avoid any political turmoil, it might have come at the right time for the Chancellor as Trump may perceive a fragile coalition as weak and imposed heavier tariffs on German exports. With a new government in place, Berlin will be better placed to hold constructive talks with Washington and provide certainty across Europe. This might be viewed as a positive news story, therefore.

Economic Fallout & Cryptocurrency 

Turning to the world of crypto, how will the political turmoil affect the crypto market? Well with new EU wide regulation and a pro-crypto president elect, the future is bright for crypto friendly firms. New EU regulation will ensure all crypto companies in Germany register with the state’s finance ministry BaFin. This presents opportunities for further crypto adoption in the EU and North America. Moreover, crypto adoption in Germany is high. This is reflected in the recent flurry of activity in the realm of crypto. For example, the German state missed out on a potential profit of $1.1B as it sold off 50,000 BTC early. Sold at $53,000 per coin, Bitcoin has hit highs of $91k following the election of Trump. The Bitcoin was seized in a criminal case named “Movie2k”. German authorities are required by law to sell assets with price fluctuations of over 10% to avoid losses. In another criminal case “Operation Final Exchange” saw the closure of 47 crypto exchanges used for money laundering back in September. If Scholz can survive the confidence vote and ensure a stable government returns, even in the form of another coalition, it will provide opportunities for the German crypto market to expand. Watch this space.

Away from crypto, Europe’s largest economy is in trouble. Narrowly avoiding recession in late October, the German economy grew by just 0.2%. Following Russia’s invasion of Ukraine, Europe was rocked by a spike in energy and high levels of inflation. This has added to the political instability in Berlin. As Trump talks tariffs, it’s vital that German politicians step up to form a new government. 

Moreover, Germany has been leading the EU’s economic sanctions package aimed at curtailing Russia’s war effort. This, along with its military expansion, has been key in helping support Kyiv. The confidence vote and possible snap election will need to be resolved quickly to avoid any further economic disruption to the German economy. This is important if Germany wishes to retain its role in aiding Ukraine and funding its own military renaissance. With the pro-crypto Trump in the White House, a stable Germany will benefit in the crypto market space. Furthermore, with signs that the economy is slowly recovering from a period of stagnation, it is time for Berlin to take advantage of this opportunity to provide renewed leadership in Europe.

Disclaimer

The information contained in this document should not be relied upon by investors or any other persons to make financial decisions. It is gathered from various sources and should not be construed as guidance. The information contained herein is for informational purposes only and should not be construed as an offer, solicitation of an offer, or an inducement to buy or sell digital assets or any equivalents or any security or investment product of any kind either generally or in any jurisdiction where the offer or sale is not permitted. The views expressed in this document about the markets, market participants and/or digital assets accurately reflect the views of BCB Group. While opinions stated are honestly held, they are not guarantees, should not be relied on and are subject to change. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This document may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Past performance of the digital asset markets or markets in their derivative instruments is not a viable indication of future performance with actual results possibly differing materially from those stated herein. We will not be responsible for any losses incurred by a client as a result of decisions made based on any information provided.