The German election on February 23, 2025, is shaping up to be the most unpredictable in years.
The far-right Alternative für Deutschland (AfD) is polling at record highs. The center-right Christian Democratic Union (CDU), under Friedrich Merz, is widely expected to win.
Meanwhile, markets are pricing in a government that will lift Germany’s restrictive debt brake, although things are not that simple.
The outcome of this election will be the biggest shock to German politics since World War II.
What does the CDU/CSU want?
The CDU/CSU is running on a business-friendly platform that aims to cut taxes, ease regulations, and modernize Germany’s economy.
They promise to reduce corporate tax rates from 29.9% to 25%, eliminate the controversial Supply Chain Act, and lower income taxes for middle- and low-income workers.
They also want to modernize work laws, shifting maximum working hours from a daily to a weekly limit, giving more flexibility to workers.
Energy policy is another focus. The CDU/CSU plans to roll back climate-focused regulations, including abolishing the Building Energy Act, which forces property owners to replace oil and gas heating.
Nuclear power is back on the table, with proposals to research small modular reactors and extend existing plant lifespans.
On immigration, the party takes a stricter stance than before, calling for faster deportations, limiting family reunifications, and outsourcing asylum applications to third countries, potentially Rwanda.
However, they are careful to distinguish themselves from the AfD by maintaining a pro-EU stance. While they reject EU debt-sharing, they support a stronger, more competitive European Union.
The biggest uncertainty is the debt brake, a constitutional rule that limits annual deficit spending to 0.35% of GDP.
Friedrich Merz is still undecided, having hinted at reform but stopping short of clear commitments.
A grand coalition with the SPD could allow some flexibility, but significant reforms will need a two-thirds majority in parliament.
How extreme is the AfD’s manifesto?
The AfD’s 2025 manifesto cements its status as Germany’s most radical party, sharpening its anti-immigration stance and embracing economic nationalism.
Their immigration plan revolves around mass deportations, framed as a “comprehensive repatriation offensive.”
They have controversially included the term remigration, an “ethnonationalist” concept advocating the forced return of non-European heritage citizens to their ancestral countries.
This stance has made the AfD toxic to all potential coalition partners, effectively blocking them from the government. For now at least.
On economic policy, the AfD is pro-market and anti-regulation, promising lower taxes, deregulation, and a smaller welfare state.
They oppose the EU Green Deal, CO₂ taxes, and wind energy expansion. Instead, they want to restart coal and nuclear power plants and reopen Russian gas supplies.
Their foreign policy is pro-Russia and anti-EU. They advocate for lifting sanctions on Moscow, repairing the Nord Stream 2 pipeline, and keeping Ukraine out of NATO and the EU.
Although they don’t explicitly call for leaving the EU, their manifesto states that Germany should exit the bloc, and they want to replace the euro with the Deutsche Mark, a move that could trigger the breakup of the Eurozone.
Despite their rising support, every major party refuses to work with them.
Markets are almost entirely dismissing the possibility of the AfD entering government, but this could be a costly miscalculation if voter turnout surprises.
What is the most likely outcome, and what does it mean for the economy?
Polls suggest CDU/CSU will lead the next government, likely in a coalition with the center-left SPD. Markets favor this outcome because it would keep AfD out of power and likely soften the debt brake.
But there’s a catch. Even if the CDU and SPD agree to loosen the debt brake, Germany’s constitutional law requires a two-thirds majority to change it.
That means coalition talks could drag on for months, delaying any economic stimulus.
Germany’s economy desperately needs investment. GDP growth is already weak, and the global economy isn’t helping.
Oxford Economics forecasts that even a mild trade war with 10% tariffs on European exports will hit Germany harder than most.
The country is highly exposed to global demand, and its manufacturing-heavy economy has struggled in an era of tech dominance.
Source: Oxford Economics
While German stocks have rebounded recently, they are still trading at a steep discount compared to the US.
Valuation metrics show German stocks are cheaper than the rest of Europe, but there’s a twist: Germany’s tech sector is actually overvalued, trading at higher earnings multiples than US tech stocks.
If a market correction comes, tech-heavy German indices could suffer more than expected.
What is the market pricing in, and is it wrong?
The market assumes that the CDU will form a government, that the debt brake will be relaxed, and that the AfD will remain excluded from power.
If all of this happens, Germany could enjoy a modest economic boost as fiscal policy becomes slightly more flexible.
But that’s not the only possible outcome. If AfD overperforms and gains influence, markets are not pricing in the risk.
A coalition breakdown could also lead to another period of political instability, delaying much-needed economic reforms.
There is also the risk of policy deadlock.
Even if a CDU-SPD coalition is formed, ideological differences could prevent meaningful stimulus measures, keeping Germany trapped in its low-growth cycle. The debt brake reform, if it happens at all, will be slow and complicated.
Finally, there is the question of Germany’s export future.
The country is deeply integrated into global supply chains, and with rising protectionism in the US and China, its traditional economic model is under pressure.
If trade restrictions increase, Germany may struggle to find growth beyond its tech sector, which lacks the global dominance of Silicon Valley giants.
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