Germany – Limited economic impact from German election
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The most likely result of the German election on February 23 is a coalition between the conservative CDU/CSU and the Social Democrats (SPD) ‘Grand Coalition’ or the Greens ‘Black-Green’, in both cases with CDU’s Friedrich Merz as chancellor.
We estimate a 50% probability of a reform of the ‘debt brake’, which could allow the structural deficit to increase from 0.35% to 1.50% through a special treatment of investments. If the reform of the debt brake is made, it could boost GDP growth by 0.20 percentage points in 2026, 0.25 percentage points in 2027, and 0.20 percentage points in 2028. In absence of a reform, similar fiscal stimulus would likely come from targeted off-budgets funds.
The German economy has contracted two years in a row and the unemployment rate is rising. At the same time, the economy is faced with structural challenges from an ageing population, shutdown of Russian gas supplies, and rising competition from China. Consequently, a main topic of the German federal election on 23 February is how to revive the ailing economy, meaning the outcome could have substantial implications for future growth. As the largest economy in the euro area, accounting for nearly a third of its output, Germany has also an outsized influence on growth prospects in other European countries. In this piece, we review the most likely government coalitions and what a new government could mean for fiscal policy and, consequently, the growth outlook.
Government coalitions: Grand coalition, black-green, or Kenya?
Unlike Northern European countries, minority governments are exceptions at the federal level in Germany, necessitating a coalition. With around 30% support in the polls, the CDU/CSU is positioned to claim the chancellorship, as the largest party traditionally does. However, their support is waning after a migration deal with the far-right Alternative for Germany (AfD), sparking protests and challenging the parties' "firewall" against the AfD. Nonetheless, the AfD is unlikely to join any coalition. The German voting system makes both a ‘Grand Coalition’ and a ‘Black-Green’ coalition more likely despite poll numbers not adding up to 50%, as the FDP, the Left, and BSW risk not reaching the 5% threshold.
‘Grand Coalition’ between CDU/CSU and SPD (current polling: 44%): Such a coalition is currently the most likely and it has previously been in office from 2005 to 2009 and from 2013 to 2021. A grand coalition government is expected to pursue a pro- European and pro-business agenda. Both party programmes emphasise reviving the German economy, albeit through different means. The CDU/CSU aims to lower income and corporate taxes by nearly €100 billion annually, while the SPD proposes establishing a €100 billion public investment fund, raising the minimum wage from €12 to €15, and offering a 10% tax rebate for companies investing in Germany. Compromises between the two parties would likely involve tax cuts for middle- and low-income groups and support for businesses.
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