Germany's CDU/CSU have won the elections and will now form a coalition government. Challenges include how to kickstart growth and adapt fiscal policy.

Key points

  • The centre-right Christian Democratic Union/Christian Social Union won the German elections held on February 23 with 28.6% of the votes, putting CDU leader Friedrich Merz on track to be the next Chancellor. His first job will be to form a coalition government. 
     
  • Negotiations with the Social Democrats, which came third with 16.4% of the vote, will focus on bridging differences on issues such as fiscal reform and domestic policies. A change in the fiscal stance is likely, with more spending on defence, but may not result in a major stimulus. 
     
  • Any reform of Germany’s debt brake or the creation of a special fund will take time given the existence of a blocking minority and is therefore unlikely to affect growth before 2026. 
     
  • Given more debt issuance is likely, German bond yields may have to rise further if they are to become more attractive. The blue-chip DAX appears reasonably valued despite its strong performance over the past year and could benefit if key reforms are implemented. 

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