Germany election results: "coalition deadlock could create a slow burn of volatility and uncertainty"

Germany’s ballot box could send shockwaves through the eurozone, with the centre-right CDU/CSU securing a victory but lacking a clear majority, potentially leading to a coalition deadlock that could create a slow burn of volatility and uncertainty. The German elections represent a moment of reckoning for the euro, as Europe’s largest economy, it has been the anchor of eurozone stability. Meanwhile, the unprecedented rise of the right-wing populist AfD, nearly doubling its 2021 result, has introduced further unpredictability into the country’s political future. While CDU/CSU has previously ruled out working with the AfD, pressure is mounting within conservative circles to reconsider, adding a new dimension to coalition talks which would represent a fundamental realignment in German politics. However, if CDU/CSU refuses to engage with the AfD, coalition-building will become more complex, requiring a broader multi-party agreement that could significantly delay policymaking.

Germany turns into France Mark 2. Like in last year’s French parliamentary elections, an inconclusive result will lead to weeks if not months of negotiations with the single aim of keeping out the “far-right”. As anticipated, the centre-Right CDU won yesterday’s German election with 28.6% of the vote, propelling Friedrich Merz to the Chancellorship. The AfD is set to come second with 20.85%, marking the strongest result for a far-Right party since WWII. A largely muted reaction to date in the currency markets has seen the Euro steady against its main currency peers, the Pound and the Dollar. All eyes are now on the coalition negotiations and potential reforms to Germany's "debt brake", which limits government borrowing. Relaxing the debt brake rule could lead to increased fiscal spending, potentially strengthening the Euro. Investors hope the new government will implement growth policies.