We are now a few days away from the German general election (on the 23rd), which is becoming even more significant in the context of the Munich Peace Conference, where pronouncements from American officials that the US is pushing Europe to take a greater role in its defence (and in that of Ukraine)¹, and in particular the courting of the far-right AfD by both Elon Musk and Vice President JD Vance, have proven highly controversial.

As we write, the centre-right CDU has close to 30% in polls, the AfD has 21%, the SDP 15% and the Greens are on 13%.²

Our sense is that the next Chancellor will be Friedrich Merz, the leader of the CDU (allied to the CSU in the south of Germany). He will lead a coalition, most likely made up of the Social Democrats – where Olaf Scholz might be deposed as leader by Boris Pistorius if that party does not perform well. It is possible, given their hawkish stance on Russia, that the Green Party might also be part of the coalition. At the same time, it is not clear whether the FDP, currently a coalition partner, will garner enough votes to take part in parliament, and the same is true for the far-left nationalist Sahra Wagenknecht Party (BSW).

The context of the election is important. Germany’s economy has been moribund³ – weighed down by the shock of the war in Ukraine, a muddled energy policy, the constraints that planning laws put on urban development and a growing debate on immigration amidst several terror attacks. The economy, immigration and, to a lesser extent, military spending are the main issues in the campaign.

In particular, Friedrich Merz, a corporate lawyer and former chairman of BlackRock in Germany, has recently upped the ante on immigration and, a week ago, proposed a new policy on border control in parliament.⁴ The fact that the far-right AfD voted for this proposal caused consternation because the mainstream political parties in Germany have a ‘firewall’ on any form of cooperation with the AfD.⁵ In a subsequent public speech, Merz stood his ground and reaffirmed his tougher stance on immigration,⁶ in a sign that he is prepared to take much bolder policy decisions than Olaf Scholz who we believe has had an indecisive chancellorship.

We also believe that the attention that American politicians and Musk have paid to the AfD is not only a sign of poor judgement on their part but a development that will likely damage relations between the US and Germany in a significant way. The AfD have little to no chance of serving in government, as both Merz and Scholz have stated on multiple occasions.⁷ 

Assuming that Merz is elected, he has several policy challenges. The first is to reform Germany’s energy policy,⁸ potentially by introducing more nuclear and fusion-driven power. The second is to pare back planning regulations, and the third will be to find pragmatic ways around Germany’s debt brake in order to permit greater military spending⁹ — combat readiness is a very serious issue for Germany’s military.

From an economic and investment point of view, the question we are focused on is whether the coronation of Merz as Chancellor will catalyse a change in sentiment in the German economy and a recovery in economic growth. The DAX index is already powering ahead this year and is one of the best-performing equity markets.¹⁰

Once the election is over, we will be focused on the urgency and speed with which a coalition can be formed (compromises will need to be found on issues like tax reform, immigration and foreign policy) and the extent to which Germany starts to play a leadership role on the EU stage.

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