Germany is going to the polls in a vote that will probably change who controls the biggest economy in Europe.
It’s happening in the midst of a faltering economy, with China’s demand for German exports collapsing and Germany suffering the twin blows of cheap Russian gas being cut off. The Ifo business climate index, a commonly used business indicator, is close to its lowest points since the start of the COVID pandemic.
The 630-seat Bundestag is up for election on Sunday, February 23. Seven months after a quick election was decided upon, that is taking place. The official counted results will begin to be disclosed half an hour after the first exit polls, which are expected at 6 p.m. local time, or noon Eastern.
After then, months of discussions are to be expected until a party secures an absolute majority, which is extremely unlikely. Analysts at Morgan Stanley predict that a new government might be sworn in as early as April.
Voters in Germany cast two ballots under a convoluted system: one for the party’s electoral list and one for the candidate in their individual constituency. Additionally, a party must receive at least 5% of the vote in order to be admitted to the Bundestag, the parliament.
Friedrich Merz of the center-right Christian Democratic Union is most likely to be the next chancellor. The CDU and its Bavarian sister party, the Christian Social Union, or CSU, are predicted to receive 29% of the vote, according to Politico’s poll of polls.
With 21%, the anti-immigrant Alternative for Deutschland, backed by Elon Musk, comes in second. Although his party recently collaborated with the AfD on a migration measure in the legislature, which drew criticism from the former leader of the CDU, former longterm chancellor Angela Merkel, Merz has repeatedly vowed not to include the AfD in his ruling coalition.
Merz would form an alliance with the Green Party or the left-center Social Democratic Party, which is presently led by Chancellor Olaf Scholz, if he were to reject the AfD. Or perhaps both. The SPD is at 16% and the Greens are at 13%, according to the Politico poll roundup.
According to Citi’s economists, the CDU’s partnership with the SPD is likely to result in a slight relaxation of Germany’s stringent debt-brake regulations, pro-industrial measures, and a hike in the minimum wage. Citi’s economists predict similar policies under the Greens, but with more funding for defense and more room for labor-law liberalization.
The world might be shocked by an AfD triumph, which is a very, very remote prospect. In such scenario, anticipate a sharp decline in the euro (EURUSD)—although the AfD has just retracted its desire to leave the common currency—a collapse in the stock market, and a large widening of bond-yield gaps with peripheral Eurozone nations.
A coalition led by the AfD with the CDU as the minority party would also be unlikely, although not as likely.
“We believe that, like in other nations, collaboration between the far right and center-right would stop disruptive initiatives like the EU, NATO, and euro withdrawal. According to Citi’s economists, it would enable the adoption of a conservative economic agenda, specifically tax cuts, which might accelerate growth.
Germany’s stock market has been thriving ahead of the election, with the main DAX DX:DAX index up 13% so far this year and consistently setting new records.
This year, the MDAX XX:MDAX of enterprises with a stronger local focus has increased by 8%.
This year, the U.S.-listed iShares MSCI Germany ETF EWG has increased by 14%, much above the S&P 500 SPX’s 4% increase.
