The Two Weeks That Will Be (20th September 2026)
1. Germany
Chancellor Merz is not long for this world. It may be constitutionally difficult to remove him but it is no longer sustainable for a governing party to take successive electoral beatings whilst polling at record lows. The results in Berlin and Mecklenberg-Western Pomerania may not yet be final but on the heels of Saxony-Anhalt, they will prove final for Merz. For the CDU to come close to failing to gain electoral representation at the 5% threshold level (as early results show in Mecklenberg-Western Pomerania) is literally existential.
Merz was barely the CDU’s first choice as leader, securing the job only at the third attempt (cc: Andy Burnham) and then stumbled at the first hurdle as Chancellor, failing to win the Bundestag’s backing on the first ballot despite a notional parliamentary majority, something unprecedented in post-war Germany. Nine days after winning the election, Merz junked his party’s traditional fiscal orthodoxy, exempting defence spending above 1% of GDP from Germany’s debt brake. He then rushed the change through the outgoing parliament, before the Bundestag *that voters had just elected* could take its seats with an AfD-Left blocking minority able to veto it. Having no mandate, fragile internal support and evaporating public backing only ends one way: a change of leader and – ultimately – a fresh election.
The only question is whether the CDU/CSU can achieve the Kanzlertausch (Chancellor swap) without triggering an imminent election. They may be unable to control the transition. Whether Merz resigns or is threatened with a Constructive Vote of No Confidence (which is then followed through), the alternative candidate must win a majority of MPs in the Bundestag. The CDU/CSU only hold a third of seats themselves, limping over the majority line thanks to their equally wounded coalition partners the SPD. An alternative Chancellor must be agreed by an absolute majority of the Bundestag (not just those present for the vote) and – crucially – takes place under a secret ballot. Even if an alternative candidate thought they had a rock solid supportive majority, that can crumble when an MP goes to the ballot box and votes with their heart while lying to the party management with their head. In the 1982 Kanzlertausch, Helmut Kohl only cleared the majority line by 7 votes, fewer than his coalition notionally commanded. He went on to call a fresh election within six months.
The post-Weimar German constitution was supposed to entrench stability. It has become too rigid to cope with the fragmentation of the electorate that has taken hold across western democracies. Germany has the added cultural constraint that leaves the AfD verboten despite consistently leading opinion polls. Ignoring almost a third of voters with an ever more desperate firewall will only lead to a conflagration of the entire system.
2. The UK
In a bid to avoid such a systemic breakdown, supporters of the UK PM are increasingly considering an early general election. This, they argue, would generate a smaller but more controllable Labour majority which could finally shed the shackles of committing not to raise the big three taxes. Their opponents are all on the backfoot: the Reform party framework remains nascent and its leadership is preoccupied with regular scandals; the Conservatives remain several pct pts behind their woeful 2024 result; and the Green Party is about to find its leader resoundingly defeated in the upcoming Holborn & St Pancras by-election. Momentum is dropping for every party except Labour.
There just remains the very small issue of the upcoming Budget. To govern is to choose and even if Burnham is an effective communicator and campaigner, the fiscal mathematics force prioritisation where the losers are unlikely to find comfort from a TikTok video. Despite an attempt to downplay the exercise, the rise in Gilt yields and defence spending black hole inherited from Starmer will force tough decisions. It appears Andy was hoping to be a lucky general, talking a good game in a bid to skim over the Budget and then launch the grand Ten Year Plan in November. The failure to grasp the fiscal facts is reflected by the FT Long Read on how “the walls close in” which contained the following quotation from a ‘senior Labour official’:
“I don’t think John Healey knew; I don’t think Andy knew. Until you get the proper briefings you can only know so much. John was not in access talks with the Treasury until it was way too late.”
This has been seized on as evidence of disingenuous deflection of blame. In fact it is likely a reflection of how successive post-Truss leaders have pursued a government by spreadsheet. The Trussian PTSD delegated an overwhelming degree of power to the OBR, with HMT locked in an Excel battle supreme as they attempted to force an output headroom number that would apparently satisfy markets and thus guarantee the leader could live to fight another day. Hence the extreme leaks under Reeves as policy wheeze number 31 on the list was pitted against a flexed assumption on productivity buried on tab 93 in an iterative process that exhausted all players. Healey and Burnham are unlikely to be able to get their head around all of that, not least when the latter probably believed that Starmer and Reeves’ undoing was their poor politics rather than the mathematical intricacies of modelling economics. The OBR have taken to engaging external experts to support their forecasts, as much to explain them to Downing Street as to improve their own analysis.
This time round, the process will be mercifully truncated as the OBR are conducting only one pre-measure forecast round, apparently to give the Chancellor more time to decide what measures will then make the cut. Cue some fraught shuttle OBR/HMT diplomacy which should begin to happen from the middle of next week, which is when we expect the OBR forecast to be finalised in the wake of the latest PSNBR number released on Tuesday.
You can tell the government is beginning to wake up to reality with the solidifying of plans to lower the level at which the Mansion Tax applies, threats from big donors to pull support if gambling tax is raised, and yet again tweaking tiny items such as changing the tax treatment of holiday lets. None of these will be enough. Rather than dragging out the Budget process, we are therefore likely to get sudden lurches as the government has to recalibrate its plans and concomitantly its communications management. The touchy feely hope of Burnham has already been replaced by a touch of the “tough decisions“; the rhetoric is about to take a handbrake turn. Trump, Iran, the Tories, Thatcher – none will escape blame from what he is about to have to do. He will roll spending cuts into the future just as Reeves did but the market may not swallow that this time, not least given the huge amount of debt from hyperscalers as well as governments that now requires digestion. Where Reeves went big and ultimately went home, Burnham will go small and go to an election. He hopes to do so from a position of strength but it will be imposed from a position of weakness.
The Bank of England have offered a small amount of breathing room with their rather complicated disentanglement from Quantitative Tightening. The pause on active Gilt sales for six months arrives at an opportune moment with bond markets under pressure; the 10 year yield is up almost 40bps from the day Burnham walked into No10. We will get more information from the BOE with two thirds of the MPC delivering speeches: Lombardelli, Dhingra and Breeden on Thursday, Ramsden on Monday 28th September, Taylor on Tuesday 29th September and Mann on Thursday 1st October. There is a 2032 Gilt auction on Tuesday and 2036 on Tuesday 29th September which will provide an opportunity to see whether yields are indeed attractive enough for buyers at the current juncture of heightened inflation and political risk.
3. The US and The UN
Where disenchanted electorates stymy decision making, the executive powers in the two most powerful countries in the world meet to decide everyone’s futures. President Xi is going to skip the UN General Assembly and head straight to Washington DC to chat with President Trump on Thursday. Both men will be aware of the impact of rising energy prices. But for resolution of that, both will need to address matters elsewhere: on Wednesday the Iranian President will address the UN; Israel’s Netanyahu follows on Thursday. Ukraine’s Zelensky and Russia’s Lavrov will also make speeches. And of course there will be the signing of an agreement between the US, Denmark and Greenland to “strengthen security”.
The decisions of all of these men will determine the path of the global economy more than the usual bellwether data points of the US Manufacturing ISM on Thursday 1st October and Payrolls on Friday 2nd October.
