SSGA: German election - three party coalition worst case for policy initative

SSGA: German election - three party coalition worst case for policy initative

13 februari 2025

Politiek Duitsland
Duitse vlag.jpg

Elliot Hentov, Head of Macro Policy at US asset manager State Street Global Advisors, provides his view on the upcoming German elections:

Three-party coalition as worst outocme for policy initiatives

'Figure 1 shows our estimates of national polling as applied to parliamentary seat wins, with both the Christian Democratic Union (CDU)/Christian Social Union (CSU)-Social Democratic Party (SPD) as well as the CDU/CSU-Greens coalition teetering around a narrow majority. Either coalition would be limited in terms of policy swings given the gaps between the center-right CDU/CSU and the other two coalition parties. The worst outcome for policy would be if neither of these coalitions gather enough for a majority and are therefore forced into a three-party coalition, further limiting policy initiatives.'

It’s All About Fiscal Priorities

One of Germany’s remaining big competitive advantages is the country’s fiscal space. At 62% of GDP, the public debt ratio is considerably lower than that of other large, developed economies. Given that Germany can fund itself at an average rate of less than 2.5%, it would be easy to identify public spending that generates greater returns. Any public investment is also likely to lift the country’s productivity rate and therefore should be fiscally positive in the long run.

The harder policy challenges revolve around how to contend with major external challenges such as Chinese competition, US protectionism, and rising security costs. And internal challenges include finding novel approaches to foster the energy transition while preserving competitiveness, digitizing the economy, creating new sources of innovation, and balancing aging demographics with the social problems emanating from excess immigration. In this context, higher public investment should be an achievable goal, but we only expect a headline fiscal boost of less than 1% of GDP by 2026.

Investment Implications

Germany’s modest fiscal expansion will not be enough to change the investment fundamentals for German and European assets. Weak economic growth, albeit stronger than in 2024, coupled with falling inflation will keep bond yields in decline and the euro weak in the near term. However, greater issuance of Bunds and the growth gap in favor of Europe’s periphery imply narrower spreads between Bunds and peripheral bonds. The exception is France where we continue to see political paralysis and fiscal excess weighing on long-term government bonds (OATs).

German equities have performed well recently, and the next government is likely to be more business friendly, sparking off some modest animal spirits. But German companies remain vulnerable to global growth trends – this means, less US protectionism and stronger Chinese stimulus than expected would be an important tailwind for equities.

Gerelateerde berichten