On 23rd February, 60 million Germans voted in 299 constituencies across 16 states. We reflect on the preliminary final results and consider the implications for investors.
Why are these elections important?
Germany is the third largest economy in the world and the biggest in Europe, historically driven by a powerful host of industrial companies that export successfully across the world. The policy direction taken by Germany in the next four years will set parameters for the European Union and, by extension, have a significant impact on the world economy.
What were the priority issues?
Climate change was the top issue for voters in 2021, but after a series of fatal terrorist attacks on civilians in the past year, the question of security is now top of mind. This has been exacerbated by the Russian war on Ukraine and the recent signals that the U.S. is no longer interested in providing a shield for Europe.
Pre-election polling1 had shown respondents naming peace and security (45%), the economy (44%), and social justice (39%) as the most important issues. These were followed by pensions and old-age security (22%) and climate protection (also 22%).
For investors, the top issues have been anemic economic growth, weak productivity, the constitutional obstacle to issuing debt (which is badly needed for public investment in infrastructure and defense), and Germany’s vulnerability to potential tariffs on exports to the U.S. at a time of worsening EU relations with China.
What were the results?
As expected, the Christian Democrats (CDU/CSU) with its leader Friedrich Merz will lead the next German government achieving 28.6% of the vote, followed by the right wing AfD (Alternative for Germany) who doubled their support from the last election with 20.8%. Behind them came the Social Democrats (SPD) with 16.4%, the Greens with 11.6% and Die Linke (left) with 8.8%. The BSW (left) with 4.97% and the FDP (liberals) with 4.3% will not enter the German Bundestag because they did not cross the 5% barrier. All the other parties combined added up to 4.4%.
Despite the anticipated right-wing gains from the AfD, which won 20.8% of the popular vote and 152 of the seats, a combination of the CDU/CSU and SPD were the expected winners, with a combined 45% of the popular vote and 328 of the seats (316 seats required for the majority).
Voter turnout was 82.5%, an increase of over 9% from four years ago and the highest turnout since the German reunification.
What will the new government look like?
Germany’s proportional representation model is designed to help smaller parties gain access to the Bundestag and stop single-party control. This explains why there are 41 political parties in Germany, of which 10 ran candidates in every constituency.
This system means that Germany tends to be governed by coalition governments. With the vastly experienced CDU/CSU and SPD gaining a combined 45% of the seats, they could form a governing coalition, although still short of the two-thirds required to structurally change the debt brake rule, for example.
The importance of the smaller parties becomes disproportionately higher when they cross the 5% barrier to gain entry to the Bundestag. It also makes the mechanics of coalition-building much harder.
What are the implications for markets?
Policy proposals during the campaign included some level of debt brake reform, although probably not to the degree that capital markets would like. Markets will also be looking for the establishment of a special purpose fund (or funds), which could be quickly launched to allow greater expenditure on defense, infrastructure and energy.
Investors are expecting lower corporate tax and stable electricity costs for industrial customers, although should remember that structural changes take time, and the benefits will only be seen from 2026.
Equity investors are focused on the CDU/CSU proposals to reduce the corporate tax rate from 30.8% to 25% over four years. Analysts estimate this could boost earnings for equities by 1.1% in 2027 and up to 1.9% in 2029. The sectors that would likely benefit most are defense, utilities, capital goods, autos, property and, to a lesser extent, banks and chemicals.
German elections have not historically driven movements in the Euro, regardless of outcome. The focus in currency markets is almost exclusively on the potential reform of the debt brake, which would require a two-thirds majority in the Bundestag. However, if the other reforms such as taxes, finance for defense and energy security) come through, this should underpin the Euro.
Endnotes
- Source : election analysts Forschungsgruppe Wahlen February 14th, 2025
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

