Around 60 million Germans are eligible to vote in Sunday’s national parliamentary elections. For decades, German elections have been predictable and uneventful, but this time, much more is at stake—far beyond just the composition of the Bundestag.
The outcome could reshape not only Germany’s political landscape but also the trajectory of Europe’s economy, once powered by German industry. Investors across Europe and beyond are watching the results with a mix of hope and concern.
Political anxiety meets carnival satire
Germans are not widely known for their sense of humor, but at a recent Karnevalssitzung—one of the satirical theatre shows common in Cologne during carnival season—self-mockery took center stage. The dominant theme of the evening? A pointed question: “Are we going back to the 1930s or the 1990s?” The audience responded with loud laughter, underscoring the uneasy blend of anxiety and irony surrounding the country’s political moment.
The reference to the 1930s is not accidental—Germany was then marked by political extremism, economic collapse, and the rise of authoritarianism. Today, with far-right AfD polling at 22 percent, some fear echoes of that past. By contrast, the 1990s were defined by stability and economic integration, as Germany reaped the benefits of reunification and played a leading role in shaping the European Union.
“If Germany can send a clear signal that it is ready to push forward in a fiscally responsible way, it could be a real game-changer.”
Tof Goovaerts, Bank Nagelmackers
The snap elections in Germany present an opportunity to reset the economy, according to financial sector observers. “There’s a lot at stake. Not just for Germany, but for Europe as a whole,” said Tof Goovaerts, chief economist at Bank Nagelmackers, in an interview with Investment Officer. “If Germany can send a clear signal that it is ready to push forward in a fiscally responsible way, it could be a real game-changer.”
Investor focus: reviving Europe’s largest economy
For investors, the key question is whether Germany can revive its economy. “With 37 to 38 percent—just under 40 percent—Germany remains the eurozone’s largest economy. If the engine starts running again, it might be a good time to consider European equities,” said Goovaerts.
Whatever the outcome, Germany must avoid economic stagnation, he warned, citing France as a cautionary example. There, President Emmanuel Macron has struggled to pass a budget due to counterpressure from Marine Le Pen’s Rassemblement National, which holds 31 percent of parliamentary seats.
Macron’s gamble as bad example
“One thing last year made clear—Macron took a gamble and lost,” Goovaerts said. “The political deadlock in France weighed on markets, and if we see a similar stalemate in Germany, markets will likely react negatively.”
The CAC 40 ended 2024 in positive territory but suffered from underperformance due to political uncertainty. “If that scenario plays out in Germany, I don’t see European equities excelling this year—certainly not outperforming global markets,” said Goovaerts.
With less than a week to go, the DAX 30 in Frankfurt is trading near its all-time high, but investors are hedging a pullback, as reflected in outstanding DAX options. The 28 largest positions are in puts, with the first call option appearing at position 29. The put volume is 2.6 times that of calls, well above the long-term average of 1.5, according to Börsenzeitung. This signals heightened risk awareness in the market.
Industry wants bold growth agenda
Germany’s economy has slowed significantly in recent years. The Federation of German Industries (BDI) projects a small contraction for 2025, while the International Monetary Fund forecasts GDP growth of just 0.3 percent.
BDI President Peter Leibinger is pushing for a bold growth agenda focused on structural reforms, tax relief, and investment in infrastructure and innovation. He urges the new government to cut corporate taxes to 25 percent, reduce bureaucratic hurdles, ensure affordable energy for businesses, accelerate digitalization, strengthen European cooperation, and develop a clear industrial strategy to boost competitiveness.
“I can’t remember the last time industrial sentiment was this low,” said Leibinger. “We need a decisive plan to revive the economy. Without a strong economy, every other political challenge becomes even harder to solve.”
Debt brake debate
For years, Germany has strictly adhered to its Schuldenbremse, or debt brake, keeping fiscal debt under control. The ongoing debate over this policy led to the collapse of Chancellor Olaf Scholz’s three-party traffic light coalition of Social Democrats, Liberals, and Greens.
At asset manager DWS in Frankfurt, chief economist Martin Moryson argues that Germany has become a victim of its own success in maintaining a balanced budget. “The debt brake works: no additional debt, no growth,” he said. “In terms of GDP, we are now at end-2019 levels—five years of zero growth. If you maintain this fiscal policy, you end up with a debt-to-GDP ratio of 15 percent—far too low for a mature economy.”
Even former ECB president Mario Draghi sees such debt restrictions now as self-imposed internal trade barriers. “Europe has been effectively raising tariffs within its borders,” he wrote in the FT on Friday. “Acting in this way has delivered neither welfare for Europeans, nor healthy finances, nor even national autonomy, which is threatened by pressure from abroad. That is why radical change is needed.”
Removing the debt brake requires a two-thirds majority. Only a Große Koalition (GroKo, or grand coalition) could achieve this, but polls suggest forming such a government will be challenging.
Share of seats in the Bundestag, in %
Many of Germany’s leading economists, as well as the Bundesbank, support modifying the debt brake. According to the Bundesbank, relaxing the rule could free up around 30 billion euros per year towards investments or tax cuts.
Stefan Hofrichter, AllianzGI’s global economist and head of macro research since 2011, believes a compromise is “likely—even if it will not be easy to achieve.”
Two votes matter
German voters cast two ballots on Sunday. The first is for a local candidate in one of the 299 constituencies. The second determines the number of seats each party receives in the Bundestag based on its nationwide vote share.
Under new electoral rules upheld by Germany’s constitutional court in Karlsruhe, a candidate can only win a constituency seat if their party is entitled to it, based on second votes. This means a candidate who wins a majority in their constituency may still not secure a seat in the Bundestag. The maximum number of seats has been reduced to 630, and overhang seats—previously used to balance representation—have been eliminated.
Long road to reform
Even under the most favorable election outcome, a US-style fiscal stimulus package is unlikely, said Katharine Neiss from PGIM Fixed Income. “We see the latter half of 2025 as the earliest possible time for reforms or increased spending to be agreed, with 2026 more plausible.”
A clear signal from Germany could provide a much-needed boost for Europe, Goovaerts argued. “It wouldn’t be a bad thing if Germany sent a clear signal to Europe: ‘Come on, let’s move forward. It’s five to midnight—not just geopolitically, but economically as well.’ If that happens, these elections could provide a much-needed boost.”