German Election Preview

German Election Preview - Quick Take

February 21, 2025

6 min read

Elias Haddad

German Election Preview - Quick Take

German federal election is held Sunday. The first exit polls are due at 6:00pm local time.
A supportive EUR scenario is a solid CDU win. A weak CDU win would weigh on EUR.
A bearish EUR scenario is if AfD manage to get more than a third of the seats in parliament.

German federal election is held Sunday. The first exit polls are due at 6:00pm local time. Polls show Chancellor Olaf Scholz’s center-left Social Democratic Party (SPD) is expected to be voted out of office. Friedrich Merz, whose center-right Christian Democrats (CDU) and Christian Social Union (CSU) sister party are up to 10 points ahead in the polls, is on track to be the next Chancellor. The populist Alternative for Germany (AfD), led by Alice Weidel, is projected to be the second biggest party in parliament.

Of note, the head of leading German pollster Forsa summed it up best when he noted that “Rarely have the uncertainties before a ballot been as great as in this federal election…The final decision is more difficult than ever for many. Many just don’t know who to vote for.” Indeed, more than 10% of voters are still undecided.

Unless a party wins an outright majority - which is highly unlikely – it could take weeks or months of negotiations for parties to form a coalition government. The three most likely coalition possibilities are: (i) CDU/SPD “grand coalition”, (ii) CDU/Green, or (iii) CDU/SPD/Green. All parties have ruled out cooperating with AfD.

The most EUR supportive scenario is a solid CDU win that would pave the way for a two-party coalition (CDU/SPD or CDU/Green). Such a coalition would have a good mandate to push through fiscal reforms more effectively. Both the SPD and Green have long favored loosening the so-called debt brake - which restricts annual structural deficits to 0.35% of GDP in any fiscal year. Meanwhile, CDU leader Merz is open to relaxing the debt break “if extra borrowing were to boost investment.”

A less supportive EUR scenario is a weak CDU win that would pave the way for a three-party coalition (CDU/SPD/Green). This could lead to more political paralysis and further delay any meaningful fiscal support to the struggling Germany economy.

A bearish EUR scenario is if AfD manage to get more than a third of the seats in parliament. First, constitutional changes like relaxing the debt brake would be hard to implement. Any change to the constitution requires two-thirds majorities in both houses of parliament and AfD opposes any reform to the debt break. Second, deeper EU integration would face significant constraints. The AfD platform calls for Germany to leave the “Euro-System” and the reintroduction of a national currency. Odds are slim that AfD gets more than a third (i.e. 211) of the 630 seats in the future Bundestag. Polls show AfD could win as much as 150 seats.

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