BERLIN

Germany’s next government would face a demanding economic and reform agenda as the country navigates its most significant economic crisis since reunification in 1990.

The center-right Union, composed of the Christian Democratic Union (CDU) and the Christian Social Union (CSU), won Sunday’s general election with 28.52% of the vote and 208 seats in the Bundestag, according to provisional results.

The far-right Alternative for Germany (AfD) surged to second place with 20.8% of the vote and 152 seats, marking a 10.4 percentage point increase from the previous election.

The Social Democratic Party (SPD) secured third place with 16.41% of the vote and 120 seats, followed by the Greens with 11.61% and 85 seats, and The Left (Die Linke) with 8.77% and 64 seats.

The Sahra Wagenknecht Alliance – Reason and Justice (BSW) contested the elections for the first time but narrowly missed the 5% threshold with 4.9% of the vote.

Meanwhile, the Free Democratic Party (FDP), which had withdrawn from the previous government and triggered early elections, failed to pass the threshold, receiving 4.3% of the vote.

SPD seen as likely coalition partner for CDU/CSU

The election results suggest that the SPD is the most viable coalition partner for the CDU/CSU, potentially leading to a more efficient government than the previous three-party coalition, which included the Greens.

The election took place amid stagnant economic growth and structural challenges. With CSU leader Friedrich Merz securing 28.6% of the vote, he is now set to form Germany’s next coalition government as chancellor.

The AfD’s result was the best performance for a far-right party in Germany since World War II, sending shockwaves through the country’s political landscape. The outcome underscores the urgent need for political realignment and the swift formation of a stable government, particularly as Europe faces a costly rearmament race and potential trade tensions with the US.

Economic reforms and coalition talks

Economists and business leaders are urging swift government formation and economic reforms to address mounting challenges. Analysts warn that the deep political divide could complicate coalition negotiations.

Chancellor-designate Friedrich Merz faces Germany’s biggest economic downturn since reunification. The incoming government must tackle key issues, including debt brake reform, modernizing transportation infrastructure, digitalizing public administration, increasing defense spending, advancing energy transition and addressing rising rent prices.

Germany’s debt brake (Schuldenbremse), introduced in 2009 during Angela Merkel’s first term, limits annual structural deficits to 0.35% of GDP. While some parties advocate easing the rule to stimulate growth and finance defense spending, analysts caution that political uncertainty could prolong stagnation.

Experts weigh in: Germany at a crossroads

Carsten Brzeski, global head of macro at ING, said that Germany is heading toward another grand coalition as the country’s political landscape becomes increasingly fragmented.

Brzeski warned that lengthy coalition negotiations could erode consumer and business confidence, making it uncertain which policies will gain consensus.

“The longing of many Germans and Europeans for political and economic stability will not end today,” he wrote in an ING Think blog post.

He expressed skepticism about the next government’s ability to deliver major economic reforms, predicting only temporary economic relief through modest tax cuts, minor reforms, and limited investment.

Holger Schmieding, chief economist at Berenberg Bank, said Merz would have limited financial flexibility but may push for pro-growth reforms.

Schmieding also pointed out that populist parties now control over a third of Bundestag seats, giving them the power to block constitutional amendments, which require a two-thirds majority.

This could hinder efforts to create new special funds, increase defense spending, support Ukraine militarily and reduce tax burdens on businesses and workers.

Thomas Gitzel, chief economist at VP Bank, stressed the need for a long-term financing framework for sectors like education, infrastructure, digitalization, and defense to boost investor confidence.

Meanwhile, Matthias Hoppe, portfolio manager at Franklin Templeton, highlighted that international investors are closely watching Germany’s new government for structural reforms to revive the economy.

Marcel Fratzscher, president of the German Institute for Economic Research (DIW), urged coalition partners to set aside differences and work together, warning that Germany cannot afford political gridlock amid escalating crises.