Germany is the third largest economy in the world and the biggest in Europe, historically driven by a powerful host of industrial companies that export successfully across the world.
On 23rd February, 60 million Germans in 299 constituencies voted, with huge implications for Europe and the world. There are 16 states, each with their own state government. This time, there will be a net reduction of seats in the Bundestag, to 630 from 733 currently. The policy direction taken by Germany in the next 4 years will set parameters for the European Union and by extension, have a significant impact on the world economy.
What are the priority issues?
In 2021, climate change was the top issue for voters. After a series of fatal terrorist attacks on civilians in the last year, the question of security is now top of mind, exacerbated by the Russian war on Ukraine and the recent signals that the U.S. is no longer interested in providing a shield for Europe. The latest polling[1] shows respondents name peace and security (45%), the economy (44%), and social justice (39%) as the most important issues. These are followed by pensions/old-age security at 22 per cent and, lastly, climate protection, also at just 22 per cent.
For investors, the top issues are anaemic economic growth, weak productivity, the constitutional obstacle to issuing debt (which is needed for public investment in infrastructure and defence) and Germany’s vulnerability to potential tariffs on exports to the U.S. at a time of worsening EU relations with China.
What will the new government look like?
Germany’s proportional representation model is quite different from the United States, and it helps smaller parties gain access to the Bundestag and is designed to stop single party control. This is why there are 41 political parties, of which ten presented candidates in every constituency. This system means the country tends to be governed by coalition governments, of which the vastly experienced CDU/SPD which would expect to garner 46% of the seats appears the preferred option of the electorate. A third partner could be the Greens, who would take the coalition votes up to nearly 60%, a powerful majority, but still short of the two thirds required to structurally change the debt brake rule, for example. The importance of the smaller parties is disproportionately higher, as the more of these cross the 5% barrier to entry in the Bundestag, the harder the coalition-building mechanics.
What are the implications for investors?
Looking at the policy proposals, it does seem likely that there will be some level of debt brake reform, albeit probably not to the degree that the capital markets would like to see. The expectation is of a special purpose fund (or funds) which could be quickly launched to allow higher expenditure on defence, infrastructure and energy requirements. Investors expect lower corporate tax and stable electricity costs for industrial customers but should remember that structural changes take time, and the benefits will only be seen from 2026 onwards.
Equity investors are focused on the CDU/CSU proposals to reduce the corporate tax rate from 30.8% to 25% over four years. Analysts estimate this could boost earnings for equities by 1.1% in 2027 and up to 1.9% in 2029. The sectors that look most promising are Defence, Utilities, Capital Goods, Autos, Property and to a lesser extent, Banks and Chemicals.
FX
German elections have not historically driven the Euro, regardless of outcome. The focus is almost exclusively on the potential reform of the debt brake which requires a two thirds majority in the Bundestag. However, if the other reforms (taxes, finance for Defence & Energy security) come through, they should underpin the Euro.
