It is fair to ask the question, though. Merkel’s standing in Germany has deteriorated sharply over the past nine months as refugee numbers have increased.
At the time (last summer), it was remarkable that a head of state had an approval rating of around 80% after a decade in power. As shown below, as of the end February only 48% of Germans are happy with her work; the lowest level since the Fukushima nuclear disaster in Spring 2010, which prompted 180 degree turn in her party's nuclear policy and Merkel’s approval rating.
The risks to her position have clearly increased, but I would be much more worried if there was a strong opposition in sight. But after a decade of Merkel, there is no one left in other parties or within her own party, the CDU, who would be an obvious successor.
The traditional party alternative (SPD) is part of Merkel’s coalition government and too weak to form a government. As shown in the breakdown below, it’s polling at 24% compared with the CDU’s 35% and its leader is even less popular than Merkel. Things look no different within the CDU; there is no one who has a broad base within the party and is popular with voters, at a stretch perhaps the 73 year-old Finance Minister Wolfgang Schaeuble as an interim leader.
That’s not to say that Merkel is invincible, but the greatest risk to her Chancellorship is unlikely to come from within the German political universe. Event risk is more likely to upset the balance. A further increase in refugee numbers would ultimately be difficult to survive or more incidents of tensions with refugees, like New Year’s Eve in Cologne or worse.
While Merkel’s departure would certainly fill endless newspaper columns I doubt it would materially change most of Germany’s key policies. Particularly when it comes to matters of European integration and immigration, there is a very broad consensus within German mainstream politics, as evidenced by cross-party support for Merkel’s policies in Bundestag votes during the euro and immigration crises.
Merkel has been such a dominant figure of German and European politics over the last decade that her departure would leave a temporary period of uncertainty. Assuming she leaves involuntarily, European politics will probably in a relatively fragile state at the time. This would not be a good combination from a risk assets perspective and investors would likely demand a higher risk premium for European assets. But our general view is that political risk premiums tend to be temporary and we would be inclined to lean against.