Following Germany’s recent federal election, the conservative CDU/CSU alliance, led by Friedrich Merz, has emerged victorious with 28.5% of the vote. The far-right Alternative for Germany (AfD) secured 20.8%, marking its best result to date. The Social Democrats (SPD) garnered 16.4%, their lowest since World War II. Merz is expected to form a coalition government, likely with the SPD, aiming to establish a stable administration by Easter.

The election outcome has instilled a sense of optimism in financial markets. Frankfurt’s DAX index rose by 0.6% on Monday, outpacing other European markets. The euro also strengthened against the U.S. dollar, reflecting investor confidence in the anticipated coalition’s potential to implement pro-business reforms.

Business leaders have expressed cautious optimism. Siemens CEO Roland Busch emphasized the urgency of implementing known solutions to enhance competitiveness, stating, “We don’t need any further discussions… we need implementation now.” Similarly, E.ON CEO Leonhard Birnbaum called for decisive steps to boost productivity and invest in innovation and infrastructure.

Key industries are poised to benefit from the new government’s policy direction. The defense sector, in particular, has seen significant gains, with shares in companies like Rheinmetall rising by 57% this year. This surge is attributed to expectations of increased defense spending under the CDU/CSU leadership, especially in light of global geopolitical shifts and calls for Europe to bolster its security capabilities.

However, challenges persist. Germany’s economy has faced consecutive contractions in 2023 and 2024, attributed to high energy costs, weak consumer demand, and competition from China. The incoming government will need to address these issues promptly. Reforming the “debt brake,” a constitutional rule limiting budget deficits, is a contentious topic. While some advocate for its relaxation to enable increased public investment, achieving the necessary parliamentary majority for such a change remains uncertain.

In summary, the election results have provided a boost to market confidence, with expectations of pro-business reforms and increased investment in key sectors. The formation of a stable coalition government and its ability to implement effective economic policies will be crucial in determining Germany’s economic trajectory in the coming years.