The conservative alliance of the Christian Democratic Union (CDU) and its sister party, the Christian Social Union (CSU), is set to take the helm of Germany once more following a pivotal federal election on Sunday. Securing 28.6% of the votes, the CDU-CSU emerged victorious over their rivals, with the far-right Alternative for Germany (AfD) capturing 20.8% and the center-left Social Democratic Party (SPD) trailing at 16.4%. This election marks a significant turning point with the highest voter turnout since at least 1990, at 82.5%, yet it also reflects the lowest ever vote share for Germany's two major parties.
Friedrich Merz, the CDU-CSU's candidate, stands on the brink of becoming Germany's next chancellor, poised to succeed Olaf Scholz of the SPD. As Germany navigates through an economic crisis characterized by a faltering car-and-export-oriented economy and contentious debates over immigration, Merz faces formidable challenges. Additionally, the CDU-CSU has firmly stated it will not form a coalition with the AfD, despite their rising influence and popularity.
"We have won it because the CDU and CSU worked well together and we prepared very, very well for this election and also for taking over governing responsibility." – Friedrich Merz, CDU-CSU candidate
The most probable coalition appears to be between the CDU-CSU and SPD, focusing on pro-growth reforms and rational immigration policies. Alternatively, a three-party coalition including the Greens remains a possibility. The election has brought an end to a period of political uncertainty in Germany, Europe’s largest economy, yet challenges remain on both domestic and international fronts.
"The less bad news first: Germany will get a new government that can put an end to a long period of debilitating political uncertainty once it has agreed on its agenda." – Holger Schmieding, chief economist at Berenberg Bank
Economists speculate that the CDU-CSU and SPD coalition could ease regulatory and tax burdens on businesses and pursue more efficient energy policies. In contrast, strategists at Deutsche Bank highlight that the centrist parties fall short of a two-thirds majority needed for constitutional amendments, potentially requiring support from fringe parties for key reforms.
"The result marks the lowest ever vote share for the two major parties, even as the turnout (82.5%) was the highest since at least 1990. And it leaves the centrist parties short of a 2/3rds constitutional majority, with the CDU/CSU, SPD and Greens jointly at just under 66% of seats. That means any debt brake reform, including for defence spending, would require support from one of the fringe parties. This may not be impossible, but it would require significant political compromises." – Strategists at Deutsche Bank
The muted reaction from European markets saw Germany's DAX stock market index open slightly higher by 0.4% on Monday. This indicates cautious optimism about stable governance moving forward. However, Germany’s new leadership will have to address pressing issues including its role in European geopolitics amid ongoing crises such as the war in Ukraine and potential US trade tariffs.
"We expect a two-party coalition between the CDU/CSU and the centre-left SPD to enact some pro-growth supply-side reforms, ease the regulatory and tax burden on businesses somewhat, and pursue a more rational immigration and a less inefficient and costly energy policy." – Holger Schmieding, chief economist at Berenberg Bank
The rise of the AfD continues to be a concern for many Germans due to their anti-immigration stance and populist policies. The CDU-CSU's refusal to ally with them underscores a commitment to centrist values despite political pressures.
"Although the AfD and The Left together appear to have the number of seats required to form a blocking minority for constitutional amendments and reforms, which require a two-thirds majority in parliament, we note that The Left is in favour of reforming the debt-brake rule." – Economists in Barclays Cross-Asset Research team