German elections on 23 February 2025 are shaping up as the most unpredictable election in recent years.
Alternative fur Deutschland, a far-right party, is at record levels of support. Friedrich Merz’s Christian Democratic Union (CDU) is expected to be the winner.
Markets are pricing in the possibility of a German government lifting its restrictive debt brake. However, things aren’t that easy.
This election’s outcome will have the greatest impact on German politics since World War II.
What is the CDU/CSU’s goal?
CDU/CSU runs on a platform of business-friendly policies that aim to reduce taxes, relax regulations and modernize Germany’s economy.
The promise is to lower corporate taxes from 29,9% to 25% and eliminate the Supply Chain Act. They also pledge to lower income tax for low and middle-income workers.
The government also wants to modernize the work law by shifting from daily limits to weekly ones, thus giving workers more flexibility.
Another focus is energy policy. CDU/CSU plan to repeal climate-based regulations including the Building Energy Act which requires property owners to switch to gas and oil heating.
The nuclear power debate is back, and there are plans to extend the lifespan of existing plants as well as research into small modular reactors.
The party has a more strict stance on immigration than it did before. It calls for deportations to be made faster, limits the reunification of families, and outsources asylum requests to tertiary countries. This could include Rwanda.
They are however careful to differentiate themselves from AfD, by maintaining an EU-friendly stance. They reject EU debt sharing, but support a more powerful and competitive European Union.
Debt brake is the biggest unknown. It’s a rule in constitution that restricts annual deficit expenditure to 0.35 percent of GDP.
Friedrich Merz has not made a decision. He hinted towards reform, but did not make any clear promises.
The SPD and a grand coalition could provide some flexibility. However, significant reforms require a majority of two thirds in the parliament.
What is the AfD manifesto like?
AfD’s manifesto 2025 cements the AfD’s status as Germany’s most radical political party. It sharpens its anti-immigration position and embraces economic nationalism.
The immigration plan of the Trump administration revolves around deportations in mass, which are framed under “a comprehensive repatriation offense.”
The term “remigration” has been controversially added. It is an “ethnonationalist concept that advocates the return of non European heritage citizens back to their ancestral country.
The AfD has become toxic for all possible coalition partners. They are effectively blocked from joining the government. At least for now.
AfD’s economic policies are pro-market, anti-regulation and promise lower taxes, deregulation and a smaller state welfare.
The EU Green Deal is opposed, as are CO2 taxes and the expansion of wind power. They want instead to restart nuclear and coal power plants, and open Russian gas supplies.
They have a pro-Russian and anti-EU foreign policy. Their foreign policy is pro-Russia and anti-EU.
They don’t call explicitly for the EU to be left, but their manifesto says that Germany should leave the group and that they would like the Euro replaced with the Deutsche Mark. This could lead to the dissolution of the Eurozone.
Every major party has refused to collaborate with the group despite their growing popularity.
The markets are almost completely dismissing any possibility that the AfD could enter government. However, this may be an expensive miscalculation in the event of a surprise voter turnout.
What are the likely outcomes and their implications for the economy
According to polls, the CDU/CSU is likely to lead the next coalition government in the middle-left SPD. The markets favor this result because AfD would be kept out of government and the debt brake could possibly be softened.
There’s one catch. The German constitution requires two-thirds approval to amend it, even if CDU and SPD are in agreement to relax the debt brake.
The coalition negotiations could last for many months and delay any economic stimulus.
Germany desperately needs to invest. The global economy hasn’t helped the GDP growth, which is already low.
Oxford Economics predicts that even mild tariffs of 10% on European exports would hit Germany more than the rest.
Its manufacturing-heavy economic system has been struggling in the age of technology dominance.
German stocks, while they have recovered recently, still trade at a significant discount to US stock prices.
German stocks have a lower valuation than other European stocks, but the tech sector in Germany is overvalued. It trades at a higher multiple of earnings than US tech shares.
German indexes that are heavily tech-oriented could be more affected than anticipated by a correction in the market.
Is the price of the market correct?
Markets assume that CDU is going to form the government. They also expect that debt will not be a problem and the AfD won’t get into power.
As fiscal policy is made more flexible, Germany may see a small economic boom.
This is not the only outcome. The markets do not price in risk if AfD outperforms or gains influence.
The collapse of a coalition could lead to a new period of political instability, which would delay much needed economic reforms.
The risk of deadlock in policy is another possibility.
Even if the CDU and SPD form a coalition, ideologic differences may prevent Germany from taking meaningful stimulative measures. This would keep Germany in a low growth cycle. If the debt brake reform happens, it will take time and be complicated.
The future of German exports is also a question.
With the rise of protectionism from China and the US, it is evident that its economic model, as it has always been, is being challenged.
Germany’s tech industry, lacking the dominance that Silicon Valley has on a global scale, may find it difficult to grow if trade restrictions are increased.
The post What you should know about German elections: Party policies and the biggest bet on the stock market may change as new information becomes available.
