DWS: Impact of German elections on markets could be positive

24 februari 2025

The outcome of the elections in Germany does not make it easier to solve the structural economic problems in the country. The impact on the financial markets may be slightly negative in the short term, but there is a good chance that a coalition will emerge soon because there is certainly a sense of urgency in Berlin due to domestic and certainly also international developments.

It may take at least a few days for the implications of these results to sink in, not least in terms of who will negotiate with whom and on what timetable, also given possible changes in party leadership. In terms of economic policy implications, three points stand out.

First, the new government is likely to find it very tricky to get any constitutional amendments through both houses of parliament. This is because the centrist parties (CDU/CSU, SPD and Greens) together will not have the required two-thirds majority in the Bundestag. At least in the short term, that limits the scope for changes to Germany’s self-imposed fiscal rules known as the debt brake. In the longer term, though, the need to presumably include The Left in such discussions could potentially open the door for more radical reforms than SPD and the Greens had been pushing for. However, Germany is likely to continue to comply with European Union (EU) law, which also limits the fiscal room for maneuver.

Second, the need for compromises during coalition talks and beyond will limit how much Merz could deliver in areas such as cutting taxes and red tape. Tackling Germany’s major structural economic problems therefore still looks like a daunting task.

There is now a tangible sense of urgency among mainstream policy makers, not least in the face of international pressure. A long period of uncertainty should certainly not be ruled out just yet. But this could pave the way for a relatively smooth coalition formation, which might come as a modestly positive surprise for markets.

Asset-class implications

In light of the above, election day itself is unlikely to mark a major turning point in terms of the actual policy outlook or market sentiment. Rather, it will be the policies laid out in the final coalition agreement and, more importantly, their eventual implementation that will be decisive for markets.

Fixed income & currencies

In German and indeed European government bonds we expect to see only a limited impact, though a quick formation of a new government and subsequent reforms would be seen as positive for the longer-term growth outlook. Similarly, the impact on foreign-exchange markets looks set to be muted. For corporate credit we do not see any marked impact, whether or not a government can be formed quickly. Germany accounts for 14% in the iBoxx Euro Corporate Index, which is well diversified in terms of sectoral exposure.

Equities

There may be some disappointment in German equity markets that the Christian Democrats did not win a stronger mandate for more deregulation and less wealth redistribution. But even such reforms would have had little immediate impact on earnings expectations. In any case, and especially for European equities more broadly, the bigger question is likely to be how quickly the continent's largest economy can form an effective government in the face of, for example, U.S. tariff threats.

Alternatives

For infrastructure, a quickly formed new government focused on delivering infrastructure projects would be critical. Germany is a key bottleneck in the European energy market, and so a strong government focused on delivering on infrastructure would be generally positive.

For real estate, we would highlight restrictions on how quickly residential rents can go up in rental hotspots (known as “Mietpreisbremse” and currently due to lapse at the end of this year). The outgoing government already planned to prolong this until 2029 on relatively favorable terms for landlords. Given the salience of rents as electoral issue, notably in terms of mobilizing support for The Left, we would not be surprised to see slightly more stringent restrictions than previously envisioned.