The German election results haven’t quite sent shockwaves across Europe, but you may have felt a little wobble. While Alternative for Germany performed slightly above expectations, the ruling Christian Democratic Union looks set to stay in power as part of a broad coalition.
This will likely include the centre-left Social Democratic Party, whose proportion of the vote has tanked to its lowest value since the pre-War Weimar Republic. The result is interesting from a political perspective, and reflects a trend of far-right gains across Europe.
But to what extent will this influence the policies of the new coalition and its incoming leader? More pertinently for us, what impact is this likely to have on businesses and the economy in the short to medium-term—both in Germany and across Europe?
Who won the German election?
The election marks a nervous victory for the CDU, with their 28.6% share of the vote not quite meeting the requirements for a majority government. Instead, the party and its new leader Friedrich Merz will look to form a coalition that excludes the 2nd place AfD, and embraces parties around the political centre. This will likely include the SPD, whose leader Olaf Scholz ran the last coalition, but whose support has tanked since winning the last election in 2021.
AfD’s 20.8% of the vote came in spite of a string of scandals over the past few years, including several MPs being suspended for Nazi remarks, and some officials being involved in secret meetings about the deportation of naturalised German citizens. The election also repeated a trend that is being seen among young people, where Gen Z are abandoning the political centre—in both directions. While AfD secured 21% of the vote among 18 to 24-year-olds, Die Linke (The Left) scored 26%, with the SPD on 11% and the Greens on 10%.
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Die Linke’s 8.8% share of the overall vote represents a remarkable turnaround, after the party looked like leaving the Bundestag entirely in the last election. The broad swathe of parties finding similar success is also a marker of a healthy democracy, and the benefits of proportional representation. This is a double-edged sword for the CDU and the new coalition—both making it easier to group up and oppose AfD, and harder to actually govern together to stop them.
Avoiding the Alternative
Whatever the AfD result says about the growth of the far-right across Europe, there is no tangible threat just yet so long as other parties refuse to work with them. 20% of the vote still means 80% of the country in opposition, and a coalition will continue to be possible without them so long as similar forces align. However, events in France show that forming consensus among multiple parties can lead to disagreements, instability, and inaction, all of which can end up boosting fringe party support.
Like his counterparts in the UK and France, however, Merz has sought to counter AfD by adopting some of its rhetoric, including some elements that may interest businesses. The incoming leader has spoken at length about how Europe needs to stand up for itself, and face the fact that the US cannot be relied upon as a military or economic partner in the wake of Donald Trump’s sanctions. Bolstering the country’s military strength will be a focus, which will benefit some businesses, but the economy will be front and centre of policymaking.
German manufacturing has suffered in recent years, particularly its automotive sector, which is facing the threat of both Chinese EVs and self-driving technology. There are also problems to address with energy security, where the country has found itself reliant on Russian natural gas exports, putting it in a difficult position as the biggest EU donor to Ukraine, and second overall behind the US. This will be even more pressing if the US pulls back on its support for Ukraine, as looks increasingly likely.
This could lead to an interesting balance being struck between Germany’s political alliances and its economic requirements. While Merz has spoken about making Germany and Europe more independent from the US and China, he also wants to promote bilateral trade as a way to strengthen Germany’s exports. This could lead to Merz pulling back on sanctions against Russia and China, and rebooting efforts at a US-EU trade deal. Success on either front could be a big win for any German manufacturing businesses and exporters.
What Merz means for businesses
As well as improving relations with developed nations, a big aspect of boosting Germany’s economic output will be increasing exports to developing countries such as Mexico, the Mercasur countries in South America, and countries in South and South East Asia. This could be challenging given how much China has been pushing to cement relationships in these areas, and form a global alliance with countries such as Russia and India to counter US influence. If Trump does follow through on warmer relations with Russia (but likely not China, given recent tariffs), this could disrupt those plans, and give Germany more of an opportunity for growth.
Merz has also spoken of building a stronger economic alliance with France, creating a joint economic engine at the heart of the EU. The previous leadership was also welcoming of improved relations with the UK, and this makes sense from the perspective of forming a European bulwark against the United States. However, it remains to be seen whether Germany will continue this approach given Keir Starmer’s efforts to court Trump, and his resistance to breaking key lines drawn around Brexit, such as freedom of movement for young people.
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Merz will also want to address the root causes of AfD’s rising support. One is immigration and asylum, an area in which the CDU has courted particular controversy thanks to Angela Merkel’s longstanding policy on asylum. Germany is well regarded for having accepted more asylum seekers than any other European nation by some margin, peaking at over 1 million per year at the height of the Mediterranean migration crisis.
This has inevitably put a certain amount of strain on public services in Germany, though the bulk of AfD’s support is from regions less directly affected by this migration, such as in the industrial heartland of North Rhine Westphalia. Nevertheless, Merz has already shown a willingness to push back against Merkel’s traditional rhetoric, and looks set to take a tougher line on migration and asylum, particularly after several recent terrorist attacks were blamed on asylum seekers. This is a playbook that’s being followed by many centrist or nominally left-wing parties in Europe, most prominently Labour in the UK, who have all but adopted the migration policies of their right-wing rivals.
The precise impact of such a policy shift on businesses is unclear. Businesses will retain access to the EU labour market through freedom of movement, although as we’ve previously highlighted, even this has been called into question as of late, thanks to an increase in emergency border controls. It’s possible that some impact will be felt at the bottom end of the wage spectrum, such as in the service industries, but this remains to be seen, and one could argue that migrants who have sought to live in Germany may be more likely to integrate and learn German than those relocating more temporarily from other European countries.
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What we will inevitably see after this election—assuming that a government can be successfully formed—is a Germany that looks to reassert its role as both the engine and muscle of Europe. This could benefit neighbours such as France, but unlike France, the German political landscape seems more ripe for cooperation, and less likely to draw the red lines of the NFP. The result should be a more effective front against populism that looks to cooperate on strengthening Germany—and producing an economic engine that both empowers Germany abroad, and helps people at home.
