​​What you need to know about Germany's upcoming election

Germany’s political background

​Germany’s upcoming snap election, following the collapse of Chancellor Scholz's coalition, is expected to be one of the most consequential in recent history. It will determine the nation's political trajectory amidst economic challenges and shifting public sentiments.

​The decision to hold early elections was precipitated by the collapse of the "traffic-light" coalition, comprising the Social Democrats (SPD), the Greens, and the Free Democrats (FDP). Internal disagreements, particularly over economic policies and budgetary allocations, led to a loss of confidence in Chancellor Scholz's leadership. A subsequent vote of no confidence in December 2024 paved the way for the Bundestag's dissolution and the scheduling of new elections.

Latest polling and party standings

​A recent INSA poll shows the centre-right Christian Democratic Union (CDU) and its Bavarian sister party Christian Social Union (CSU) alliance commanding 30% of voter support, positioning Friedrich Merz as a potential chancellor.

​The far-right Alternative for Germany (AfD) has emerged as the second-strongest force with 22% support, while the centre-left SPD trails at 15.5%.

​Trading platform users should note that the Greens hold 13%, while smaller parties like Die Linke and the BSW poll at 6% and 5.5% respectively.

​The Free Democrats (FDP) currently poll below the crucial 5% threshold required for parliamentary representation and faces potential exclusion from the Bundestag. This has happened before in the 2013 federal election when the FDP failed to meet the 5% electoral threshold, securing only 4.8% of the vote. Consequently, the party did not gain any seats in the Bundestag, marking the first time since its founding in 1948 that it was not represented in Germany's federal parliament.

Potential coalition scenarios and market implications

​Several coalition possibilities exist, with the most viable being a "Kenya Coalition", named after the colours of Kenya’s flag and comprising the CDU/CSU, SPD, and Greens. Current projections suggest this is the only viable three-party coalition capable of securing a majority. Nevertheless, CSU leader Markus Söder has expressed strong opposition to collaborating with the Greens, complicating this potential alliance.

​Forex trading participants should monitor these developments closely, as coalition negotiations could impact the euro.

​Alternative scenarios include a "Black-Green Coalition" or a "Jamaica Coalition," though each faces significant hurdles.

​A two-party "Black-Green Coalition" (CDU/CSU and Greens) could achieve a majority. Yet, ideological disparities, particularly on environmental and economic policies, make this partnership challenging. Söder's aversion to an alliance with the Greens further complicates this scenario.

​The “Jamaica Coalition” (CDU/CSU, Greens, and FDP) mirrors the colours of Jamaica's flag: while mathematically possible, the FDP's current polling below the 5% threshold makes their inclusion uncertain. Moreover, ideological differences, especially between the CSU and Greens, present significant stumbling blocks.

​A possible “Germany Coalition” (CDU/CSU, SPD, and FDP), reflecting the national flag's colours, could be considered if the FDP surpasses the electoral threshold. However, the FDP's categorical rejection of rejoining a coalition similar to the previous "traffic-light" arrangement greatly diminishes this possibility.

​This leaves the “Grand Coalition” (CDU/CSU and SPD) which Chancellor Angela Merkel Angela successfully led for about 12 years during her 16-year tenure as Chancellor, from 2005 until 2009 and again from 2013 until 2021. However, the political landscape in Germany has changed since then. The SPD's diminished support means that this pairing may struggle to achieve a stable majority. Additionally, there is reluctance within both parties to renew this alliance due to past frictions.

​All mainstream parties have unequivocally ruled out any collaboration with the AfD due to its far-right positions. Similarly, the newly established BSW, led by former Left party member Sahra Wagenknecht, is viewed with scepticism. Both the CDU and SPD have dismissed the possibility of forming coalitions with the BSW at the federal level.

​Whichever permutation the largest German political parties are going to agree on, investors should be aware that barring any major surprises, the formation of the new German government is unlikely to significantly influence European indices in the medium-term.

Economic challenges and policy priorities

​Germany faces economic stagnation, with debate centred on strategies to revive growth through various policy measures.

​The CDU/CSU advocates supply-side reforms, including tax cuts and deregulation, while the SPD emphasises public investment.

​These divergent approaches could create volatility in the DAX 40.

​Market participants using online trading platforms should monitor these policy developments closely once a new federal government has been formed.

Immigration and climate policy impact

​Immigration policy has become a central issue, with the AfD's rise partly attributed to public concerns over border control. In response, Friedrich Merz (CDU/CSU) has proposed stricter border controls, a move that has sparked controversy, especially after receiving AfD support in a Bundestag vote.

​The Greens' push for aggressive climate policies, advocating for a swift transition to renewable energy, could affect German industrial stocks and energy sector performance. In contrast, the CDU/CSU calls for a balanced approach that considers economic implications.

​These policy debates may create trading opportunities across various sectors.

​Investors should consider how different electoral outcomes might impact specific industries and companies.

International relations and trade implications

​Germany's role in international affairs, particularly regarding the EU, NATO, and relations with major powers such as Russia, China and the US, remains crucial.

​The election outcome could influence trade relationships and economic partnerships, affecting market sentiment. Different coalition scenarios might lead to varying approaches to international trade and cooperation.

​It is of note that the AfD's eurosceptic and anti-NATO positions contrast sharply with the pro-European stances of other major parties.

​Traders should consider these factors when positioning themselves ahead of the election.

​How to trade the German election

1. ​Research the potential market impact of different electoral outcomes
2. ​Choose whether you want to trade or invest
3. ​Open an account with us
4. ​Search for relevant markets in our platform or app
5. ​Place your trade

​Remember that all trading carries risk, and you should never invest more than you can afford to lose.​​