Yesterday, the German public headed to polling stations across the country to cast their votes in the German federal election for the first time in three and a half years.
The election saw the conservative CDU/CSU alliance triumph, winning 28.6 percent of the vote.
Friedrich Merz, leader of the CDU/CSU and the man set to be Germany’s next chancellor, will now likely look to form a coalition government with the Social Democrats.
Many will react positively to the news that Germany is expected to avoid any political deadlock, with policy-making set to be easier than with the outgoing three-way coalition.
This includes the markets, which have responded well to the result. For instance, the euro briefly touched a one-month high, while Germany’s blue chip DAX index and Europe’s STOXX 600 rose by 0.7 and 0.1 percent respectively.
AvaTrade’s chief market analyst, Kate Leaman, said, “Markets are already reacting to the CDU/CSU alliance’s electoral victory. German and European stocks are looking at a solid boost. For example, the DAX, Germany’s main stock index, could see some real momentum, especially in industrials, financials, and defence. Investors are expecting a more business-friendly government, which usually means fewer regulations and policies that help companies grow.
“The euro is already moving, climbing past 1.05 against the U.S. dollar – the highest it’s been in two months. That’s a clear sign that markets are feeling good about the election outcome. If coalition talks are smooth and reforms start rolling, we could see even more strength in the euro.
“Now, bonds are another story. German Bund yields are already ticking up, and that’s because investors think the new government might ease up on its strict ‘debt brake’ and take on more borrowing. More spending, especially on infrastructure and defence, tends to push yields higher. But there’s a catch – if German borrowing costs rise too much, it could create some headaches for weaker Eurozone economies.
“On the policy front, the CDU/CSU is expected to focus on cutting bureaucracy, lowering energy costs, and trimming corporate taxes. If they follow through, that could attract more investment and help jumpstart Germany’s sluggish economy. The big debate, though, is whether they’ll tweak the debt brake to allow for more spending. Traditionally, they’ve been pretty strict about keeping debt in check, but with all the pressure to invest in infrastructure, defence, and climate initiatives, some flexibility might be on the table.
“And then there’s the global picture. A stable, business-friendly German government could be a big plus for European markets, especially with trade tensions heating up again. Trump is back in the White House, which means US-EU trade relations could get tricky. How Germany navigates that will be key.
“In the short term, markets are reacting positively. But the real test is whether the new government can actually deliver on its promises while managing external risks. There’s plenty to keep an eye on in the months ahead.”
