The CDU/CSU won the German parliamentary elections, with Friedrich Merz as its candidate for chancellor. The only viable two-party coalition, excluding the AfD, would be with the SPD. A coalition with the Greens is mathematically impossible, and none of these parties are likely to pursue a three-party coalition. In addition to migration, economic policy was a key focus of Merz's election campaign.

«The main focus of the markets is now likely to be on whether the new coalition will relax the constitutional debt brake, which regulates how much debt the government is allowed to incur,» writes Blackrock in a commentary.

However, amending the constitution would require negotiations with other parties. The SPD would likely push for concessions from Merz on social spending, while the Greens would demand commitments on climate protection. Additionally, securing the votes of the «Die Linke» party would be necessary, which could come at a significant political cost.

Strengthening the EU

Blackrock expects that under a Chancellor Merz, relations between Germany and France could improve and EU policy could also receive a boost. «This could strengthen EU policy in the areas of US trade tariffs, competitiveness, the development of artificial intelligence and gaps in defense spending.»

Allianz Global Investors is also rather positive about the election result. The failure of the FDP and BSW to reach the 5 percent hurdle would make it possible for a coalition of CDU/CSU and SPD to have a stable majority in the Bundestag.

Improved Location Factors in the Medium Term

However, an improvement in Germany's economic situatin is likely to take some time. «A business-friendly government constellation should ensure improved location factors in the medium term and initiate a revival in domestic demand,» comments Christoph Berger, CIO Equity Europe at Allianz GI.

«A new German government pursuing a business-friendly agenda could provide much-needed momentum for the struggling German economy, particularly through deregulation and tax relief. Such measures would also boost domestic consumption and overall economic growth.»

Additionally, the new government is expected to assume a stronger leadership role in the EU and globally. «Given Donald Trump's presidency in the U.S., Europe faces pressing questions on security architecture and its strategic positioning with China as a key trading partner,» Berger adds.

Comprehensive Mandate Missed

The experts at asset manager DWS take a much more cautious view of the election results. «Although the CDU/CSU came first, it failed to achieve the comprehensive mandate to reform Germany that its candidate for chancellor Friedrich Merz had hoped for.»

On the positive side, there is a palpable sense of urgency, driven in part by international pressure. «This could pave the way for a comparatively smooth coalition formation, which would perhaps be a modestly positive surprise for the markets.» However, it remains clear that securing constitutional changes through both houses of parliament will likely be a significant challenge for the new government.

Structural Problems Remain a Challenge

The need for compromises will limit Merz's ability to make spectacular progress in areas such as tax cuts and reducing bureaucracy. «Tackling Germany's major structural economic problems therefore still appears to remain a major challenge.»

Reforming the debt brake and achieving a majority in order to be able to make the necessary constitutional amendment is also a key priority for Franklin Templeton. «The hope is that the reform of the debt brake will enable Germany to make the necessary expenditures to return to a sustainable growth path,» writes portfolio manager Matthias Hoppe.

«While we remain skeptical that the next government will be able to do so, the current geopolitical situation and a potential trade conflict with the US could put enough pressure on politicians in both Germany and the European Union to initiate reforms.» However, he warns against being overly optimistic in the short and medium term.