Polls have consistently shown a lead for the conservative CDU/CSU alliance, which currently holds around 30% of vote intentions. The far-right Alternative for Germany (AfD) is polling at approximately 20%, while the Social Democratic Party (SPD), led by former Chancellor Olaf Scholz, stands at just over 15%. The Greens are close behind with around 13%, and the liberal Free Democratic Party (FDP) risks not crossing the 5% threshold required to enter the Bundestag.
 

German voting intentions (%)

What do German voters want? At issue for most is the poor state of the economy, although immigration has gained prominence in recent weeks following a series of gruesome terrorist attacks in the country. In addition to an ailing economy, businesses are primarily focused on gaining some relief from high taxes and energy prices, which have both weighed on sentiment and growth. 

Germany is lagging behind peers (Real GDP index, 100 = Q4 2019) 

What businesses want: firms’ priorities for any new government 

What are our base cases? 

The most likely scenario is a government led by the CDU/CSU, either in a coalition with the SPD or with both the SPD and the Greens. A CDU/SPD "grand coalition" appears to be the easier route to a majority but would likely hold only a slim lead. A tri-partite alliance including the Greens could be needed to navigate the complexities of fiscal policy and the debt brake issue. 

The debt break and fiscal policy 

A central theme of the election is the future of Germany's "debt brake", a constitutional rule limiting the federal government's structural deficit. While the CDU/CSU has shown openness to modifying this rule, the AfD and FDP remain opposed. The potential for significant fiscal expansion hinges on the coalition's ability to agree on amendments to the debt brake, which could increase public investment and economic growth. 

Uncertainty and smaller parties 

The presence of several smaller parties close to the 5% threshold complicates predictions. If parties like the Left and the newly established Sahra Wagenknecht Alliance (BSW) fail to enter the Bundestag, it could impact the seat distribution and coalition dynamics. The rise in support for AfD adds further uncertainty, with potential implications for social stability and market reactions. 

Short-term considerations 

We don’t expect markets to move a whole lot in the near term. Markets expect some fiscal expansion in Germany, and in our view this should be read as a positive given a weak economic backdrop and structural growth issues. So, while this does mean more issuance of bunds, we don’t immediately see this as a negative for Germany given strong debt metrics.   

However, there is a growing risk of a stronger-than-expected performance by the AfD. This may be negative for bunds driven by increasing social unrest and political uncertainty in the near term and would likely be negative for European unity given AfD’s Euroscepticism.  

German elections: the bond market playbook 

Longer-term considerations 

For markets and UK businesses, the election's outcomes could influence investment flows and economic stability in Europe. Increased public spending in Germany could boost economic growth, benefiting UK exporters and financial institutions with exposure to the European market.  

However, political instability and rising support for anti-EU parties like AfD could have adverse effects on investor confidence and market stability. 

Strategic recommendations 

Given the election's potential to drive significant market movements, large corporates should consider the following strategies: 

• Monitor developments in coalition negotiations to anticipate shifts in fiscal policy and debt issuance 
• Prepare for increased volatility in European markets, particularly in response to surprises in AfD's vote share  
• Consider reviewing your rates and currency hedging approach 

The 2025 German federal election presents a pivotal moment for the country's political and economic future. While the most likely outcome is a government led by the CDU/CSU, the composition of the coalition and its ability to address key issues like the debt brake has broader market implications.  

For UK businesses and financial institutions, staying informed and strategically positioned will be crucial in navigating the post-election landscape. Follow us on social media for more insight on the big themes shaping the economy and moving markets.