(Bloomberg) — Germany’s highest-stakes election in years is paving the way for a pivot to increased spending, with markets predicting the end of an era for constrained fiscal policy.
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The euro rose as much as 0.7% in Asian trading after Germany’s conservative opposition leader Friedrich Merz comfortably won Sunday’s federal election, in line with expectations. Contracts on the benchmark DAX stock index climbed 1%, while bond futures edged lower.
“For the markets, the outcome is favorable because Germany will still have a centrist government but it will pivot to a more pro-business, pro-investment orientation,” said Matt Gertken, chief geopolitical strategist at BCA Research. The nation will also “have somewhat better odds of avoiding a massive split with the Trump administration over trade, Russia, or China,” he said.
Merz’s CDU/CSU bloc won 28.8% of the votes, followed by 20.2% for the Alternative for Germany, according to estimates from public broadcaster ARD. The Social Democrats finished third with 16.2%, the party’s worst result since World War II. Speaking Sunday evening, Merz said he wants to form a new government as soon as possible, noting the world “won’t wait for us” to have lengthy coalition talks.
In a best-case scenario for markets, Merz would form a strong coalition with one or two other mainstream parties. Such an outcome would likely ease the path toward reforms that could reboot Germany’s moribund economy — and enable changes to a constitutional limit on borrowing, introduced in 2009 and known as the debt brake.
For Krishna Guha, vice chairman of Evercore ISI, a two-party coalition with the CDU/CSU and SPD and enough potential support from other parties to reform the brake would be “the best available outcome for Europe, Ukraine and financial markets.”
That would mark a sea-change for Germany, which has long preached fiscal prudence. But with the US pushing Europe to spend more on defense, such a shift is now on the table.
Ahead of the election, assets had already started to price in the prospect of a result that supports further borrowing: German bonds have slipped versus key benchmarks, with longer-maturity securities falling more than shorter-dated ones, pushing the yield curve to its steepest since 2022. That’s because additional borrowing tends to weigh more on longer tenors.
