On Sunday, German voters go to the polls in a high-contested election. The first exit polls will land Sunday at 6 pm CET (noon in New York) and the first results will be from 30 minutes later with continued updates from there.
The conservative CDU/CSU is leading the polls with 31%, followed by the far-right AfD at 21%, the Social Democrats at
15% and the Greens at 13%. That means there will need to be a coalition and it could take weeks to sort out. Polls have been relatively stable suggesting the scope for surprise is modest.
The base case is a two-party coalition with the conservative CDU/CSU along with the SPD or Greens with the first option providing a potential comfortable majority. Chancellor Olaf Scholz of the SPD will cede the job to Friedrich Merz, though that must go through a confirmation process in the Bundestag.
Eyes will be on how well the far-right AfD performs relative to the 21% polls. The ‘help’ from Elon Musk is likely to backfire, at least in the short-term but they changed the discussion in Germany around immigration. A strong showing from them isn’t going to be enough to gain any power as they have no credible path to a coalition but it could spur the other parties to work together to remove fiscal brakes ramp up economic stimulus.
“The perceived erosion of Europe’s security architecture makes it likely for the new
government to swiftly agree on funding higher defence spending outside the debt brake,” writes Deutsche Bank. “The fiscal impulse could be material.
However, the short-term growth multiplier should not be overestimated, with the bulk of military procurement going abroad.”
Other possibilities are corporate tax reform, de-regulation and energy reform.
Even with all that, it will be tough for the German economy to produce any growth this year.
I wouldn’t expect any gaps in euro trading on Monday and my base case is that there is some kind of relief trade, which is typical after elections.
EUR/USD day
