The Bundestag elections in Germany brought few surprises. The next government in Germany will probably consist of a coalition of the Christian Democratic Union (CDU), the Christian Social Union (CSU) and the Social Democratic Party (SPD). The next Federal Chancellor will probably be the Federal Chairman of the CDU, Friedrich Merz. In general, the conservative CDU/CSU is a business- and EU-friendly party. The potential for improving the poor situation in Germany is there. However, the environment is extremely challenging.
Defeat of the traffic light coalition
The CDU/CSU (center-right) can gain votes compared to the last election in 2021 and receives a relative majority (28.5%). The Alternative for Germany (far right) doubled its share of the vote and came in second place (20.8%). The Left Party (far left) surprises with a gain (8.8%). The parties of the traffic light coalition lose: The SPD slips to third place (16.4%), the Greens record a loss of votes (11.6%) and the FDP is no longer represented in parliament because it misses the 5% hurdle with 4.3%. The Sahra Wagenknecht Alliance (BSW) achieved 4.97% and only just missed out on a place in parliament.
Young voters favored the fringes
Voter turnout was high at 83%. This is the highest figure since reunification 35 years ago. The breakdown of votes according to age structure is striking. The 18-24 year olds favored the fringes: 25% voted for the Left, 21% for the AfD. In contrast, the over 70s voted traditionally: 43% CDU / CSU, 25% SPD. The breakdown by gender and age is also interesting: young men (18-24 years) voted for the AfD the most (25%), while young women voted for the Left (34%). The geographical breakdown shows that the AfD made particularly strong gains in the east. It recorded results of between 30% and 46% in numerous constituencies.
Two-party coalition possible
A key starting point when considering possible coalition options is that a coalition with the far-right AfD party, which will be represented in the new parliament with 152 seats, is rejected by the other parties (firewall). This limits the possible options: Before the election, one of the uncertainties was how many parties would get into parliament. If all seven parties had cleared the 5% hurdle, the electoral arithmetic would probably have required a coalition of three parties. This would have made it more difficult to form a government. Because neither the FDP nor the BSW will now be represented in the future parliament, a coalition of only the CDU/CSU and the SPD has become possible. In fact, the CDU/CSU (208) and the SPD (120) together achieved 328 seats. This is 12 seats above the threshold for the required relative majority. The CDU/CSU rejects government cooperation with the Left and the Greens.
Fringe parties have a blocking minority
However, a two-thirds majority is required for the constitutional amendments. If the seats of the CDU/CSU, the SPD and the Greens (85) are added together, the total is 413 seats. This is 7 seats short of a two-thirds majority. These could theoretically come from either the Left (64) or the AfD (152). In other words, the two parties on the fringes have a blocking minority. CSU chairman Friedrich Merz has already come up with a creative idea: The current parliament could still quickly pass an amendment to the debt brake with a two-thirds majority. Although this would be legally possible, it would cast doubt on its de facto legitimacy.
Pandemic and conflicts weakend the economy
The elections took place against the backdrop of a poor situation in Germany. The economy is stagnating and prices have risen massively (stagflationary environment). In fact, real gross domestic product in the fourth quarter of 2024 was roughly at the level of the fourth quarter of 2019 (source: Federal Statistical Office). Five years of stagnation. The sharp decline in industrial production since 2018 is particularly striking. Between December 2017 and December 2024, production fell by around 17 percent. Production is now at the same level as in March 2006. At the same time, the consumer price index rose by just over 20% between December 2019 and December 2024. The pandemic, the conflict with Russia and the rivalry with China have hit Germany hard. In addition, there are structural weaknesses (ageing, low productivity, research and development in old industries) and major problems in coping with immigration. The poor mood is hardly surprising. The Ifo Institute’s report on business sentiment in February was also telling: “The mood among companies in Germany remains skeptical.”
Strengthening integrative forces in the EU
Last but not least, a conflict has also broken out with the most important ally, the USA. CDU leader Friedrich Merz described a strong Europe independent of the USA as his “absolute priority”. This is remarkable because Merz and the CDU have actually previously spoken out in favor of the transatlantic alliance to ensure security. In general, increasing pressure from outside (China, Russia, USA) is strengthening centripetal forces within the EU.
Compass for competitiveness
The European Commission has delivered a plan for more economic growth (and security) with the Competitiveness Compass. This is based on three pillars:
- Closing the innovation gap with the EU’s main competitors
- Linking decarbonization and competitiveness
- Reducing dependencies and increasing security
This plan also seems to be a good fit for Germany. Friedrich Merz’s statements suggest that a stable EU-oriented government in Berlin could mean stronger German leadership in the EU.
Debt brake makes investments more difficult
An important obstacle to greater government investment activity is the debt brake in Germany, which is enshrined in the constitution and can therefore only be changed with a two-thirds majority. This prohibits new structural government debt, i.e. debt that is independent of the economic cycle, for the federal states and limits it to a maximum of 0.35% of nominal gross domestic product (GDP) for the federal government. If the law cannot be changed because the necessary majority is lacking, creative solutions will certainly be found. For example, a rearmament bank could be established at EU level to finance higher defense spending in a budget-friendly manner.
Equities strengthened
The election result in Germany could have a positive impact on the poor mood in Germany. In addition, EU-integrative forces will be strengthened. Assuming that the debt brake is relaxed, higher government spending (and higher budget deficits) can also be expected. However, the conflict zones with the USA, Russia and China will not disappear any time soon. Ceteris paribus, the Bundestag election will strengthen the equity market to the detriment of bonds in the medium term.
Note: Past performance is not a reliable indicator for the future development. Representation of an index, no direct investment possible.
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Legal note:
Prognoses are no reliable indicator for future performance.
Election in Germany: New government must lead the country out of the economic crisis
Following the premature end of the traffic light coalition, Germany will elect a new Bundestag in around a week’s time….
