Germany's political landscape has shifted significantly following the latest elections, as the Social Democratic Party (SPD) suffered a substantial setback, losing their governing stronghold. Under Chancellor Olaf Scholz since 2021, the SPD dropped to 120 seats, marking a significant decline. Meanwhile, the Christian Democratic Union/Christian Social Union (CDU/CSU) coalition emerged as the largest party in the Bundestag, securing 208 seats with 28.5% of the vote—their second weakest performance historically.
The election results underscore a fragmented political environment, with no single party securing a majority of seats. The far-right Alternative für Deutschland (AfD) claimed 152 seats, while Die Linke saw modest gains. The Free Democratic Party (FDP) experienced a dramatic collapse, losing all 91 seats previously held. The Greens also faced electoral declines, contributing to the overall fragmentation. The combined strength of the AfD and Die Linke, holding 216 seats, grants them the power to veto any constitutional amendments.
The CDU/CSU and SPD have previously formed 'Grand Coalitions' during several terms, including from 1966–1969, 2005–2009, 2013–2018, and 2018–2021. However, the new government must navigate a complex landscape to deliver meaningful economic reforms. Economists express mixed opinions on whether the government can successfully reform Germany's constitutional debt brake.
“This would create some fiscal space beyond the debt brake limits in the fiscal year in which the escape clause is triggered,” – Garnadt
One proposed approach involves utilizing joint European funding for military expenditures as a means to reform the debt brake. This strategy aims to create fiscal leeway within existing constraints.
“Easing the debt brake also opens the door to implementing proposals from the Draghi report, which calls for further European integration and higher investments in energy transition, innovation, and defence,” – Bokeloh
Despite these possibilities, opposition remains strong from within various political factions. The AfD stands firmly against reforming the debt brake, while Die Linke opposes increased defense spending but may support debt brake reforms for greater investment.
“The AfD is against a reform of the debt brake. The Linke is against an increase in defence spending, even though they might support a debt brake reform to increase investment,” – Garnadt
The market's reaction to the election results was notably positive. By 11 a.m. CET, the DAX index had risen by 1.6%, reflecting investor anticipation of potential coalition formations.
“This could pave the way for a relatively smooth coalition formation, which might come as a modestly positive surprise for markets,” – DWS
However, experts caution that despite these developments, substantial economic transformation remains uncertain.
“The longing of many Germans and Europeans for German political and economic stability will not end today, and it's hard to see the next government being able to deliver much more for the economy than a short-lived positive impact from some tax cuts, small reforms and a bit more investment,” – Brzeski
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