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Sunday's elections in Germany have delivered their verdict. Amid a record turnout (82.5%, the highest participation rate since the reunification), the results of the vote are very close to the pre-election polls:
The centre-right CDU/CSU has won the election and will be the largest party in the next Bundestag, with its leader Friedrich Merz likely to become the next Chancellor in charge of forming a government. The centre-left SPD of outgoing Chancellor Olaf Scholtz suffered a clear setback from the previous elections and will become only the third party in terms of seats in the future Parliament. The far-right AfD recorded an upsurge in votes, in a dynamic similar to what had been seen in other recent European elections. The AfD will become the second largest party of the Bundestag, with limited influence as traditional parties have excluded a political alliance with the AfD. The Left party also recorded a significant increase in support, almost doubling its score of the previous elections. The Green party lost some ground compared to the 2021 elections. Two smaller parties, the leftist BSW and the liberal FDP, fell short of reaching the threshold of 5% of the votes required to enter the Parliament. They will therefore not have any seat in the next Bundestag.
The CDU/CSU wins the elections, the AfD becomes the second largest political force in Germany
Ahead of the elections, we had two key questions in mind, for which the answers would shape the economic prospects of Germany and Europe:
What will be the aggregate weight of parties opposed to fiscal policy easing, and will they be able to oppose a reform of the debt brake preventing public deficits for Germany’s public budget?
The FDP and BSW parties, both opposed to a reform of the debt brake and to fiscal policy easing, have failed to enter the Bundestag. But the AfD and The Left, also opposed to a debt brake reform, have posted strong showings. As a result, the aggregate share of seats in the Bundestag for those two parties will be above one-third of the votes (34% as it currently stands). This will allow them to block any change to the Constitution, for which a two-third majority of votes in Bundestag is required. An agreement between those two opposition parties and a CDU/CSU-led coalition appears highly unlikely on this matter. One of the key outcomes of the elections is therefore that the prospect of abundant fiscal policy support is significantly reduced. Tax cuts and increases in public investment for defence, infrastructures or competitiveness will have to be financed by public spending cuts or some tax increases. This issue is potentially such a constraint that Friedrich Merz floated yesterday the idea of having the Bundestag in its former composition vote for some special fund, or even a reform of the debt brake, before the newly elected Parliament is inaugurated on March 24th. Indeed, the required two-third majority for such changes could be found in the former Bundestag. Such a move may provide the financing for additional defence spendings, and free some fiscal space in the next budget that will have to be adopted by the newly elected Parliament once a government is in place.
Projected repartition of seats in the future Bundestag based on available results
After a decade as Europe’s powerhouse, Germany has revived the spectrum of “the sick man of Europe” that it was a quarter of a century ago. Its economy has been contracting for two consecutive years in 2023 and 2024 and its GDP level stands at the same level as five years ago, while all other European economies have enjoyed positive growth since the end of the COVID era. A combination of external shocks, like lower Chinese demand, end of cheap Russian gas supply, plus rising interest rates and the lack of fiscal policy support, have all led to the dismal economic performance of the largest economy of the continent. In this context, the need for economic reforms designed to improve short and medium-term growth prospects is enormous and the new government will have to take swift action to revive a positive dynamic in the economy.
The German GDP is at the same level as 5 years ago and has been stagnating since 2022
Such a challenge would probably have been made easier
with expanded fiscal policy space, but the outcome of the elections appears to limit the potential for fiscal expansion. However, the economic agenda of the CDU/CSU should provide some support to economic sentiment by lowering taxes and easing red tapes and regulatory burdens. The rise in infrastructure spending advocated by its likely coalition partner SPD could also have some positive impact on short-term activity dynamics while enhancing medium-term growth prospects. Because of the debt brake’s strict limits, the government can only lower business taxes, increase investment, or raise pensions and the minimum wage if it cuts other public spending or raises taxes elsewhere, like the VAT.
Economic activity indices have been picking up from a depressed level in 2025
As such, while the economic agenda of a CDU-led coalition can be expected to be supportive for growth prospects, it is unlikely to have a spectacular impact in the short run. However, unlike its predecessor, the new government might benefit from a more moderate environment, even if significant risks and uncertainties continue to cloud the outlook.
With China’s economic growth stabilizing and the European Central Bank in the midst of an interest rate cut cycle, some of the factors that have dampened Germany’s economic activity are starting to abate. The uncertainty surrounding developments in Ukraine and their ramifications, the need to significantly increase defense spending, and the prospects of U.S. tariffs on European imports remain significant headwinds for Germany’s economic outlook. However, some early signs of improvement have appeared recently, with a pickup in Purchasing Managers' Index (PMI) activity indices since the beginning of 2025.
This tentative positive momentum, if confirmed, will combine with the pro-business measures expected to be introduced by the next government and may help to resume a positive growth trend in Germany. Cautiousness remains essential at this stage, given the economic and geopolitical challenges that Germany is facing, as well as the uncertainties that still surround the composition of the next government. Already, the fact that there will likely be no reform of the debt brake limits the potential for rapid and visible improvements in growth dynamics.
Infrastructure investment spending and an easing of regulatory burdens and bureaucracy will take time to be implemented and to have tangible effects on growth. In the short term, the main support for economic activity in Germany might continue to come from Frankfurt rather than Berlin, as the European Central Bank will probably extend its interest rate cut cycle in the months to come. However, a new government supported by a solid coalition and promoting an agenda of supportive economic measures might help to improve business and household sentiment and initiate some form of welcomed economic momentum.
Germany needs these economic reforms just as much as Europe needs Germany’s economic drive and political leadership to meet the enormous challenges ahead. It is now up to Friedrich Merz, the CDU/CSU, and SPD leaders to live up to the situation and reach a reasonable compromise.
