On February 23rd, the German people will head to the polls in a snap election that will likely be called after the passage of a December 16th no-confidence vote against the sitting Olaf Scholz cabinet. The current government, led by a coalition consisting of Scholz’s social-democrat party (SPD) and the Greens, have overseen a de-industrializing Germany with sluggish GDP growth, as Germany is projected to log recessive growth for the second year in a row. Discontent Germans, many of which flock to the rising far-right AfD, consider immigration, excessive de-carbonization, and poor fiscal policy to be crucial issues. As election day in Germany approaches and pressure on Europe to turn around economic decay escalates, this article will introduce you to all the key players – domestic and foreign – with a special emphasis on how they will impact global financial markets.
SPD: When Incompetence Turns to Populism
The incumbent coalition is made up in largest part by the SPD, with chancellor Olaf Scholz at its helm. The party’s agenda over the past few years can been characterized as a continuation of the Europeanist and social democratic status quo. First, Germany has taken a leading position in Europe’s response to the war in Ukraine by being at the forefront of fiscal aid packages. Additionally, the SPD stuck to its social-democratic roots by refusing to make reforms to the robust German welfare state and to lax immigration laws in the early years of its rule.
However, in light of waning approval ratings and accusations of incompetency, Scholz and the SPD have seemed to shift gears on their bread and butter agenda. In a desparate attempt to fend off the threat of a surge in far-right politics in February, the SPD has attempted to appease to disgruntled voters by caving into their demands for re-industrialization, re-carbonization, and smarter fiscal spending.
A great example of the SPD’s attempt to play into populist fears has come with their rising protectionism. This has come at both the labor level and at the corporate level. At the labor level, the SPD launched an initiative in October to subsidize the purchases of domestic electric vehicles. Scholz has also tried to breathe life into Germany’s EV manufacturing sector by pushing Serbian president Aleksandar Vucic in an attempt secure a cheap and near-shore supply of lithium. On the corporate level, Scholz and the SPD immediately rebuked UniCredit’s attempt to acquire a majority stake in Germany’s second-biggest lender, Commerzbank. After UniCredit built up a 9% stake in Commerzbank, the German federal government (the largest shareholder in Commerzbank) decided to halt all further block sales of the company’s stake. Berlin’s opposition towards this cross-border deal has not gone away, as now Orcel has look domestically towards Italian Banco BPM as an alternative acquisition target. Scholz’s protectionism and unwillingness to cooperate towards the goal of the European Banking Union shows how far he has deviated from the pro- European roots of his party towards the increasingly populist-friendly appetite of the German electorate.
Another case study of the SPD’s deviation from its status quo agenda arrives in its changing approach to the War in Ukraine. Scholz is now loosening his hawkish approach towards the Kremlin. Just earlier this month, the German Chancellor had a phone call with Vladimir Putin, marking the first rupture of an over 2-year-long point of no contact. Donald Trump enters the White House in January 2025 with a staunch anti-Atlanticist rhetoric. For example, he has slammed NATO for not raising defense spending quotas to 4% of GDP for member-states. Europe therefore now stands on the precipice of supporting Ukraine’s war effort without crucial American financial and military support. Considering the increasing euroscepticism of the German opposition, and widespread anger with the cost of energy crisis, Olaf Scholz’s softening approach towards war spending in Ukraine is a crucial situation to monitor as the February 23rd snap election near.
The incumbent coalition is made up in largest part by the SPD, with chancellor Olaf Scholz at its helm. The party’s agenda over the past few years can been characterized as a continuation of the Europeanist and social democratic status quo. First, Germany has taken a leading position in Europe’s response to the war in Ukraine by being at the forefront of fiscal aid packages. Additionally, the SPD stuck to its social-democratic roots by refusing to make reforms to the robust German welfare state and to lax immigration laws in the early years of its rule.
However, in light of waning approval ratings and accusations of incompetency, Scholz and the SPD have seemed to shift gears on their bread and butter agenda. In a desparate attempt to fend off the threat of a surge in far-right politics in February, the SPD has attempted to appease to disgruntled voters by caving into their demands for re-industrialization, re-carbonization, and smarter fiscal spending.
A great example of the SPD’s attempt to play into populist fears has come with their rising protectionism. This has come at both the labor level and at the corporate level. At the labor level, the SPD launched an initiative in October to subsidize the purchases of domestic electric vehicles. Scholz has also tried to breathe life into Germany’s EV manufacturing sector by pushing Serbian president Aleksandar Vucic in an attempt secure a cheap and near-shore supply of lithium. On the corporate level, Scholz and the SPD immediately rebuked UniCredit’s attempt to acquire a majority stake in Germany’s second-biggest lender, Commerzbank. After UniCredit built up a 9% stake in Commerzbank, the German federal government (the largest shareholder in Commerzbank) decided to halt all further block sales of the company’s stake. Berlin’s opposition towards this cross-border deal has not gone away, as now Orcel has look domestically towards Italian Banco BPM as an alternative acquisition target. Scholz’s protectionism and unwillingness to cooperate towards the goal of the European Banking Union shows how far he has deviated from the pro- European roots of his party towards the increasingly populist-friendly appetite of the German electorate.
Another case study of the SPD’s deviation from its status quo agenda arrives in its changing approach to the War in Ukraine. Scholz is now loosening his hawkish approach towards the Kremlin. Just earlier this month, the German Chancellor had a phone call with Vladimir Putin, marking the first rupture of an over 2-year-long point of no contact. Donald Trump enters the White House in January 2025 with a staunch anti-Atlanticist rhetoric. For example, he has slammed NATO for not raising defense spending quotas to 4% of GDP for member-states. Europe therefore now stands on the precipice of supporting Ukraine’s war effort without crucial American financial and military support. Considering the increasing euroscepticism of the German opposition, and widespread anger with the cost of energy crisis, Olaf Scholz’s softening approach towards war spending in Ukraine is a crucial situation to monitor as the February 23rd snap election near.
FDP: The Liberal Scapegoats of a Reactionary Rise
The FDP was not a monolith player in the German ruling cabinet until now, making up only 27.8% of the SPD/Greens/FDP coalition. However, it’s laissez-faire and liberal policies have positioned it at the crossfire of blame for Germany’s recessive growth and de-industrialization. Scholz fed into populist headwinds and sacked finance minister Christian Lindner on November 6th, effectively scapegoating the FDP and dissolving the German government coalition.
As discussed previously, Scholz has looked to lean into reactionary jerks to boost his popularity. Perhaps this tendency explains his decision to bin Chirstian Lindner, the leader of the FDP, who has downplayed Germany’s economic struggles as a mere “call to action”, rather than an “emergency”. Rather than embracing fiscal stimulus, Lindner holds that Germany’s skilled labor, strong infrastructure, and intellectual property poise it for a strong rebound. As Lindner says, the issues demand “structural reforms” instead, such as working to cut red tape for enteprises.
The FDP seems to cling onto too much to the status quo to the SPD’s liking in their newly imagined politics. One great example of this is their defense of the German debt brake. For context, the German debt brake limits the German government’s annual deficit to merely 0.35% of the GDP. As a result, Germany’s current debt-to-GDP ratio is at 62%, seriously lagging Eurozone counterparts France and Italy at 99% and 140% each. Questions regarding the debt brake’s rigidity come at a time when economic leaders try to rethink Europe’s path forward by arguing for more fiscal stimulus. September’s Draghi report, which calls for €800bn/year in annual investment to maintain European competitiveness comes to mind. Therefore, Lindner and the FDP’s reluctance to revise the stiff German debt brake clashes with prevailing demands at both the academic and the constituent level. Lindner claims that Germany needs to not “spend more, but better”. He goes on to discuss the inefficiencies of immigration welfare, massive social safety nets, and de- carbonization subsidies. He even mulled the possibility of Germany pushing back its ambitious goal of 2045 carbon neutrality to the EU’s 2050 goal. While these complaints against immigration and radical de-carbonization do resonate with an increasingly impatient German electorate, the FDP’s fundamental unwillingness to boost fiscal stimulus and to deviate from the German debt brake snub them of a seat at the SPD’s growingly populist-leaning camp. It seems in this election cycle, that the German electorate is not in the mood for tepid ordoliberal politics that refuse to call Germany’s pressing de-industrialization as being an “emergency”.
The FDP was not a monolith player in the German ruling cabinet until now, making up only 27.8% of the SPD/Greens/FDP coalition. However, it’s laissez-faire and liberal policies have positioned it at the crossfire of blame for Germany’s recessive growth and de-industrialization. Scholz fed into populist headwinds and sacked finance minister Christian Lindner on November 6th, effectively scapegoating the FDP and dissolving the German government coalition.
As discussed previously, Scholz has looked to lean into reactionary jerks to boost his popularity. Perhaps this tendency explains his decision to bin Chirstian Lindner, the leader of the FDP, who has downplayed Germany’s economic struggles as a mere “call to action”, rather than an “emergency”. Rather than embracing fiscal stimulus, Lindner holds that Germany’s skilled labor, strong infrastructure, and intellectual property poise it for a strong rebound. As Lindner says, the issues demand “structural reforms” instead, such as working to cut red tape for enteprises.
The FDP seems to cling onto too much to the status quo to the SPD’s liking in their newly imagined politics. One great example of this is their defense of the German debt brake. For context, the German debt brake limits the German government’s annual deficit to merely 0.35% of the GDP. As a result, Germany’s current debt-to-GDP ratio is at 62%, seriously lagging Eurozone counterparts France and Italy at 99% and 140% each. Questions regarding the debt brake’s rigidity come at a time when economic leaders try to rethink Europe’s path forward by arguing for more fiscal stimulus. September’s Draghi report, which calls for €800bn/year in annual investment to maintain European competitiveness comes to mind. Therefore, Lindner and the FDP’s reluctance to revise the stiff German debt brake clashes with prevailing demands at both the academic and the constituent level. Lindner claims that Germany needs to not “spend more, but better”. He goes on to discuss the inefficiencies of immigration welfare, massive social safety nets, and de- carbonization subsidies. He even mulled the possibility of Germany pushing back its ambitious goal of 2045 carbon neutrality to the EU’s 2050 goal. While these complaints against immigration and radical de-carbonization do resonate with an increasingly impatient German electorate, the FDP’s fundamental unwillingness to boost fiscal stimulus and to deviate from the German debt brake snub them of a seat at the SPD’s growingly populist-leaning camp. It seems in this election cycle, that the German electorate is not in the mood for tepid ordoliberal politics that refuse to call Germany’s pressing de-industrialization as being an “emergency”.
The Greens: The Voice of the German Left
With Robert Habeck, Schulz’s Vice-Chancellor and Federal Minister for Economic Affairs and Climate Action, at the wheel, The Greens round off the fallen “traffic light” coalition. Staying true to its roots, environmental sustainability remains at the forefront of its campaign. The Greens look to continue its push to accelerate Germany’s green transition and decarbonization, aiming to beat the broader EU in the race to net zero. However, we have seen a decisive rift forming within the political left as other parties, including SPD, are beginning to adopt a more conservative outlook of easing climate policy to foster economic expansion. The trade-off between Germany’s climate ambitions and GDP growth will persist when the new coalition enters office, as a framework to amend the contractions of its automotive industry must be established. In this light, the urgent necessity to bolster Europe’s EV industry is a development that seamlessly harmonizes with the overarching objectives of The Greens.
Further, fiscal measures play a central role in The Greens’ policy. The fallout of the coalition underpinned Habeck’s and Schulz’s shared willingness to revamp Germany’s “debt brake” to foster increased spending, also embraced by the conservative CDU/CSU. Moreover, in a move to spur innovation in its sputtering economy, Habeck has proposed enacting a multi-billion-dollar fund, dubbed “Germany Fund”, targeting businesses of all sizes. The fund is set to promote infrastructure modernization and to facilitate an “unbureaucratic” investment premium of 10%, designed to encourage investments in the nation’s development projects.
Another area, in which The Greens deviate from previous collaborators, like SPD, concerns foreign affairs. Unlike the incumbent Schulz, who has caved into populist rhetoric, Habeck has affirmed the party’s commitment to supporting Ukraine in its war effort. Analysts argue its pledge strikes a positive tone given the discussed implications on Ukraine of Trump’s return to the White House in 2025, illustrating the party’s determination to compensate for previous underinvestment in defense. Yet, it forms a political divide domestically, posing considerable fiscal spending diversions, depending on which side prevails.
With Robert Habeck, Schulz’s Vice-Chancellor and Federal Minister for Economic Affairs and Climate Action, at the wheel, The Greens round off the fallen “traffic light” coalition. Staying true to its roots, environmental sustainability remains at the forefront of its campaign. The Greens look to continue its push to accelerate Germany’s green transition and decarbonization, aiming to beat the broader EU in the race to net zero. However, we have seen a decisive rift forming within the political left as other parties, including SPD, are beginning to adopt a more conservative outlook of easing climate policy to foster economic expansion. The trade-off between Germany’s climate ambitions and GDP growth will persist when the new coalition enters office, as a framework to amend the contractions of its automotive industry must be established. In this light, the urgent necessity to bolster Europe’s EV industry is a development that seamlessly harmonizes with the overarching objectives of The Greens.
Further, fiscal measures play a central role in The Greens’ policy. The fallout of the coalition underpinned Habeck’s and Schulz’s shared willingness to revamp Germany’s “debt brake” to foster increased spending, also embraced by the conservative CDU/CSU. Moreover, in a move to spur innovation in its sputtering economy, Habeck has proposed enacting a multi-billion-dollar fund, dubbed “Germany Fund”, targeting businesses of all sizes. The fund is set to promote infrastructure modernization and to facilitate an “unbureaucratic” investment premium of 10%, designed to encourage investments in the nation’s development projects.
Another area, in which The Greens deviate from previous collaborators, like SPD, concerns foreign affairs. Unlike the incumbent Schulz, who has caved into populist rhetoric, Habeck has affirmed the party’s commitment to supporting Ukraine in its war effort. Analysts argue its pledge strikes a positive tone given the discussed implications on Ukraine of Trump’s return to the White House in 2025, illustrating the party’s determination to compensate for previous underinvestment in defense. Yet, it forms a political divide domestically, posing considerable fiscal spending diversions, depending on which side prevails.
AfD: The Voice of the Reactionary Right
As formerly discussed, the rising disgruntlement with the liberal status quo and its alleged ineffectiveness has shaken Berlin. The German electorate’s increased irritation with Germany’s unmatched leadership on global issues, such as fighting climate change, funding Ukraine, and accepting migrants has pushed the electorate towards isolationism and Euroscepticism. Furthermore, dissatisfaction with German industrial decay and record-high energy prices has done damage to optimism for environmental policy. As discussed, mainstream parties such as the SPD have shifted towards a more populist agenda. However, no group has been able to resonate with reactionary voters quite like this one far-right party, labeled as an “extremist organization that threatens democracy” by German intelligence. Enter AfD.
The extreme-far-right party has emerged as an unexpected voice of the aggravated German public, drawing eerie resemblances to the rise of Adolph Hitler’s National Socialists. The party’s persistent fascist and anti-democratic rhetoric sparks fear of further social and political polarization in Germany as parties fall deeper into populist territory. Among AfD’s ranks, one finds a perturbing cast of individuals. For one, the party is co-led by Alice Weidel, who embraces a Thatcher-like economic approach of low taxes, welfare cuts, and deregulation through slices in Germany’s minimum wage. While her pro-business policy draws parallels to FDP’s legislation, it is overshadowed by the vocality of AfD’s radical bloc and its stance on immigration. Among these extremists is the head of AfD’s Thuringia division, Björn Höcke, who was infamously ruled a fascist by a German court in 2019.
The party strongly opposes Germany’s asylum laws and has led an effort to deport immigrants from Germany. Inflation and high energy costs have aided in solidifying AfD’s ousting of refugees and migrants for Germany’s economic and social pitfalls. Its anti-immigratory policy risks placing a further dent in Germany’s existing 1.34 million job shortage. Researchers have estimated the national economy beseechs 400,000 working net immigrants annually, underlining Germany’s reliance on expatriates.
AfD’s nationalistic focus underpins its hostility towards NATO and its aim to cut aid to Israel and Ukraine. The latter exemplifies an event in a string of alleged pro-Russia activity on AfD’s side. In June 2024, AfD’s top candidate for European elections, Maximilian Krah, was supposedly linked to under-the-table Russian payments, with one of his employees being arrested on suspicion of espionage for China. AfD’s willingness to collaborate with China and Russia puts it at great odds with the mainstream parties and broader EU. From a holistic standpoint, we see that AfD’s radical, populist approach to garner public appeal has isolated it from coalition opportunities with the central CDU/CSU. Therefore, it will be intriguing to see how AfD will pivot as the snap elections creep closer. It must be noted that general EU consensus remains, that the German far- right does not gain further momentum in governmental bodies.
As formerly discussed, the rising disgruntlement with the liberal status quo and its alleged ineffectiveness has shaken Berlin. The German electorate’s increased irritation with Germany’s unmatched leadership on global issues, such as fighting climate change, funding Ukraine, and accepting migrants has pushed the electorate towards isolationism and Euroscepticism. Furthermore, dissatisfaction with German industrial decay and record-high energy prices has done damage to optimism for environmental policy. As discussed, mainstream parties such as the SPD have shifted towards a more populist agenda. However, no group has been able to resonate with reactionary voters quite like this one far-right party, labeled as an “extremist organization that threatens democracy” by German intelligence. Enter AfD.
The extreme-far-right party has emerged as an unexpected voice of the aggravated German public, drawing eerie resemblances to the rise of Adolph Hitler’s National Socialists. The party’s persistent fascist and anti-democratic rhetoric sparks fear of further social and political polarization in Germany as parties fall deeper into populist territory. Among AfD’s ranks, one finds a perturbing cast of individuals. For one, the party is co-led by Alice Weidel, who embraces a Thatcher-like economic approach of low taxes, welfare cuts, and deregulation through slices in Germany’s minimum wage. While her pro-business policy draws parallels to FDP’s legislation, it is overshadowed by the vocality of AfD’s radical bloc and its stance on immigration. Among these extremists is the head of AfD’s Thuringia division, Björn Höcke, who was infamously ruled a fascist by a German court in 2019.
The party strongly opposes Germany’s asylum laws and has led an effort to deport immigrants from Germany. Inflation and high energy costs have aided in solidifying AfD’s ousting of refugees and migrants for Germany’s economic and social pitfalls. Its anti-immigratory policy risks placing a further dent in Germany’s existing 1.34 million job shortage. Researchers have estimated the national economy beseechs 400,000 working net immigrants annually, underlining Germany’s reliance on expatriates.
AfD’s nationalistic focus underpins its hostility towards NATO and its aim to cut aid to Israel and Ukraine. The latter exemplifies an event in a string of alleged pro-Russia activity on AfD’s side. In June 2024, AfD’s top candidate for European elections, Maximilian Krah, was supposedly linked to under-the-table Russian payments, with one of his employees being arrested on suspicion of espionage for China. AfD’s willingness to collaborate with China and Russia puts it at great odds with the mainstream parties and broader EU. From a holistic standpoint, we see that AfD’s radical, populist approach to garner public appeal has isolated it from coalition opportunities with the central CDU/CSU. Therefore, it will be intriguing to see how AfD will pivot as the snap elections creep closer. It must be noted that general EU consensus remains, that the German far- right does not gain further momentum in governmental bodies.
CDU/CSU: The Leading Position of the Centre-Right
Fiscal policy is gradually gaining traction as a major debate at the center of the snap elections scheduled for February 23, 2025. The loss of the SPD-Greens-FDP coalition consensus has projected the center-right CDU/CSU bloc, led by Friedrich Merz, to a leading position to take over the next government, and with it, major changes in Germany's fiscal stance, which might have a very far-reaching effect on the markets and the general economy.
The pro-European, economically conservative leader has underlined a number of policies for growth and competitiveness. Among his priorities are lowering the corporate tax rate and streamlining regulations to spur private investment, so that Germany again becomes attractive to international investors, possibly reversing the recent decline in competitiveness.
The CDU/CSU has also bitterly attacked the underinvestment of the outgoing government in public infrastructure. Merz has demanded more money for transport, digital infrastructure, and defense to meet NATO's target of 2% of GDP. Moreover, although traditionally committed to strict fiscal discipline, the CDU/CSU is now considering a moderated reform of the "debt brake" rule. Proposals suggest allowing higher deficits if they fund growth-oriented projects, such as infrastructure development. The IMF estimates that an increase in the federal deficit limit by 1% of GDP could still maintain a declining debt-to-GDP trajectory.
While most of the analysts do believe that markets are likely to respond positively to the CDU/CSU's pro-business and investment-friendly agenda - reduced taxes and deregulation could enhance corporate profitability, boosting equity markets – debates have risen over the public debt and social spending programs, which may create short-term unrest and uncertainty.
Referring to Bund emissions, the possibility of a moderated debt brake reform introduces two contrasting dynamics. On one side, reforms focused on growth friendly spending could keep investors confident in Germany's fiscal responsibility and keep yields stable or a bit higher due to increased issuance. However, if these reforms appear excessive or politically contentious to investors, German Bunds could face increased risk premia, probably causing spillover, destabilizing effects across the Eurozone bond markets.
Fiscal policy is gradually gaining traction as a major debate at the center of the snap elections scheduled for February 23, 2025. The loss of the SPD-Greens-FDP coalition consensus has projected the center-right CDU/CSU bloc, led by Friedrich Merz, to a leading position to take over the next government, and with it, major changes in Germany's fiscal stance, which might have a very far-reaching effect on the markets and the general economy.
The pro-European, economically conservative leader has underlined a number of policies for growth and competitiveness. Among his priorities are lowering the corporate tax rate and streamlining regulations to spur private investment, so that Germany again becomes attractive to international investors, possibly reversing the recent decline in competitiveness.
The CDU/CSU has also bitterly attacked the underinvestment of the outgoing government in public infrastructure. Merz has demanded more money for transport, digital infrastructure, and defense to meet NATO's target of 2% of GDP. Moreover, although traditionally committed to strict fiscal discipline, the CDU/CSU is now considering a moderated reform of the "debt brake" rule. Proposals suggest allowing higher deficits if they fund growth-oriented projects, such as infrastructure development. The IMF estimates that an increase in the federal deficit limit by 1% of GDP could still maintain a declining debt-to-GDP trajectory.
While most of the analysts do believe that markets are likely to respond positively to the CDU/CSU's pro-business and investment-friendly agenda - reduced taxes and deregulation could enhance corporate profitability, boosting equity markets – debates have risen over the public debt and social spending programs, which may create short-term unrest and uncertainty.
Referring to Bund emissions, the possibility of a moderated debt brake reform introduces two contrasting dynamics. On one side, reforms focused on growth friendly spending could keep investors confident in Germany's fiscal responsibility and keep yields stable or a bit higher due to increased issuance. However, if these reforms appear excessive or politically contentious to investors, German Bunds could face increased risk premia, probably causing spillover, destabilizing effects across the Eurozone bond markets.
The Macroeconomic Situation
Germany’s economic focus on manufacturing and industrial production has resulted in the country becoming greatly export-oriented, and even earning it the title of the “export powerhouse” of Europe. In fact, about 47% of Germany’s GDP in 2023 can be attributed to exports, specifically those in the automotive, machinery, chemicals, and pharmaceuticals sectors. Germany is globally recognized for its advancements and high standards in engineering and innovation, resulting in a high demand for German exports, especially from its largest trading partner, the European Union (which currently accounts for 54% of German exports), where Germany reaps the benefits of the currency union and single market. Specifically, Germany has developed crucial trade relationships with France, the Netherlands, and Italy which play a key role in the stability of the general European economy. Disregarding the European Union, China, and the United States are Germany’s largest trading partners, accounting for roughly 9% and 6% of German exports respectively. Germany’s reliance on trade has resulted in the country being exposed to various uncontrollable external shocks such as tariffs, recessions, and disruptions in global supply chains. For example, American protectionist policies brought by the new Trump administration and trade conflicts with China, have the potential to greatly disrupt German exports, which could greatly impact German economic stability.
From 2018-2020, during Donald Trump’s first presidency, the Trump Administration imposed 25% and 10% tariffs on steel and aluminum imports as part of a protectionist trade policy that aimed to reduce the US trade deficit and protect domestic industry. In previous years, Germany was a top exporter of metals to the US, with producers, industrial goods manufacturers, and various American firms relying on a steady flow of these German metals. After these tariffs were passed, trade was significantly disrupted as they increased export costs leading to less competitive US prices and forcing American manufacturers to search for cheaper domestic alternatives. The excess steel and aluminum that could now not be sold to the US increased the supply in the European market, resulting in lower prices and higher EU production competition. Furthermore, the automotive industry, which is the largest contributor the Germany’s export economy, and is also heavily reliant on steel greatly suffered. Large German automakers such as Volkswagen, Mercedes-Benz, and BMW, faced lower competitiveness in the US, greatly hurting their profitability as approximately 10% of their exports are fueled by US demand. The immediate outcome of the enforced tariffs was a disruption of German supply chains and a decrease in German steel and aluminum exports to the US by 25-30% compared to pre-tariff levels, leading to a slowdown in German GDP growth. As the tariffs applied to all EU countries, they resulted in retaliatory tariffs from the EU on various US exports such as metals and consumer goods, further straining US-EU relations and fueling trade uncertainty. Trump further threatened a 25% tariff solely on imported European cars, which was ultimately never imposed, but resulted in uncertainty leading to delayed investment and production decisions, stockpiled inventories, and even increased German automobile production in US plants.
Throughout the last 4 years, the Biden Administration has maintained the tariffs set in place by the Trump Administration but eased restrictions through tariff-rate quotas, allowing a certain amount of EU (including German) steel and aluminum exports to enter tariff-free. This marked an important shift away from Trump’s protectionist policies and allowed German steel and aluminum exports to the US to recover. On the other hand, Biden passed the Inflation Reduction Act which subsidized US-based clean energy initiatives and hurt German exports in sectors relating to electric vehicles and sustainable battery technology. Donald Trump, who has been reelected to be the president of the United States for the following years has outlined various protectionist policies that he plans to pass which will further harm the German economy. Trump has no intention to remove the current tariffs on foreign metals and has further proposed a general 10% tariff on all imports and a significant tariff on foreign-made vehicles. These proposed tariffs will greatly increase export costs making German goods a substantial amount less competitive in US markets and may force German automobile manufacturers to relocate to the US, which would greatly harm Germany’s export-based economy. These proposed tariffs, if imposed, will undoubtedly further strain US-EU relations and result in further retaliatory measures from the EU, worsening international cooperation and uncertainty for businesses.
China is Germany’s largest non-EU trading partner with €106 billion worth of goods exported from and €192 billion worth of goods imported to Germany in 2022. Trade between China and Germany has grown immensely over the last decades due to China solidifying itself as an industrial powerhouse and Germany’s large role in manufacturing. Countless considerable German firms such as Volkswagen, Siemens, and BASF — who compete in diverse industries — have large markets in China, where they produce and supply their products. China has thus become important to German firms not only due to sales but also as a manufacturing hub. Recently this importance has begun to raise concerns over whether Germany is over-dependent on China and the potential issues that could arise. The overall reliance on China and its economy results in a weakening German economy during slowdown periods in China. This can be seen during the real estate crisis which harmed consumer and industrial activity or during the COVID-19 pandemic where disruptions in Chinese manufacturing led to delays and shortages in German industries. To make matters worse, Trump’s reelection policy is heavily focused on reducing American reliance on Chinese goods and economic ties between the two countries are likely to be severed. This can undoubtedly have indirect effects on the German economy as fewer American imports from China could reduce Chinese imports from Germany, realign supply chains, and result in geopolitical tensions where Germany will be forced to choose a side. Recognizing their potential over- dependence, in 2023 Germany introduced the China Strategy which aims to diversify trade partners, strengthen their supply chain resistance, and safeguard their critical industries. This strategy looks to accomplish this by encouraging the investment of German companies in alternative markets, expanding trade agreements with other countries, incentivizing critical good production domestically, and tightening regulations on Chinese investments. This is a part of the modern German plan to maintain an economic relationship with China while reducing their long- term dependency on the country, which aligns with broader EU efforts.
Lastly, the recent German federal elections resulted in the far-right Alternative for Germany (AfD) receiving 16% of the vote. The rise of the AfD, whose vote increased by 4.9% compared to the previous elections, displays the German population’s increasing discontentment with EU fiscal and migration policies. This party opposes any form of deeper EU integration such as shared debt or recovery funds, and their influence could prevent Germany, which traditionally has been corroborative of such fiscal policy, from continued EU support. If the AfD presence continues to increase, Germany may be forced into a more isolationist stance, greatly harming its approval of EU policies and already strained EU relations with world powers such as Russia and China. Furthermore, this has the potential to influence other countries to follow suit and poses a large threat to EU unity.
Germany’s economic focus on manufacturing and industrial production has resulted in the country becoming greatly export-oriented, and even earning it the title of the “export powerhouse” of Europe. In fact, about 47% of Germany’s GDP in 2023 can be attributed to exports, specifically those in the automotive, machinery, chemicals, and pharmaceuticals sectors. Germany is globally recognized for its advancements and high standards in engineering and innovation, resulting in a high demand for German exports, especially from its largest trading partner, the European Union (which currently accounts for 54% of German exports), where Germany reaps the benefits of the currency union and single market. Specifically, Germany has developed crucial trade relationships with France, the Netherlands, and Italy which play a key role in the stability of the general European economy. Disregarding the European Union, China, and the United States are Germany’s largest trading partners, accounting for roughly 9% and 6% of German exports respectively. Germany’s reliance on trade has resulted in the country being exposed to various uncontrollable external shocks such as tariffs, recessions, and disruptions in global supply chains. For example, American protectionist policies brought by the new Trump administration and trade conflicts with China, have the potential to greatly disrupt German exports, which could greatly impact German economic stability.
From 2018-2020, during Donald Trump’s first presidency, the Trump Administration imposed 25% and 10% tariffs on steel and aluminum imports as part of a protectionist trade policy that aimed to reduce the US trade deficit and protect domestic industry. In previous years, Germany was a top exporter of metals to the US, with producers, industrial goods manufacturers, and various American firms relying on a steady flow of these German metals. After these tariffs were passed, trade was significantly disrupted as they increased export costs leading to less competitive US prices and forcing American manufacturers to search for cheaper domestic alternatives. The excess steel and aluminum that could now not be sold to the US increased the supply in the European market, resulting in lower prices and higher EU production competition. Furthermore, the automotive industry, which is the largest contributor the Germany’s export economy, and is also heavily reliant on steel greatly suffered. Large German automakers such as Volkswagen, Mercedes-Benz, and BMW, faced lower competitiveness in the US, greatly hurting their profitability as approximately 10% of their exports are fueled by US demand. The immediate outcome of the enforced tariffs was a disruption of German supply chains and a decrease in German steel and aluminum exports to the US by 25-30% compared to pre-tariff levels, leading to a slowdown in German GDP growth. As the tariffs applied to all EU countries, they resulted in retaliatory tariffs from the EU on various US exports such as metals and consumer goods, further straining US-EU relations and fueling trade uncertainty. Trump further threatened a 25% tariff solely on imported European cars, which was ultimately never imposed, but resulted in uncertainty leading to delayed investment and production decisions, stockpiled inventories, and even increased German automobile production in US plants.
Throughout the last 4 years, the Biden Administration has maintained the tariffs set in place by the Trump Administration but eased restrictions through tariff-rate quotas, allowing a certain amount of EU (including German) steel and aluminum exports to enter tariff-free. This marked an important shift away from Trump’s protectionist policies and allowed German steel and aluminum exports to the US to recover. On the other hand, Biden passed the Inflation Reduction Act which subsidized US-based clean energy initiatives and hurt German exports in sectors relating to electric vehicles and sustainable battery technology. Donald Trump, who has been reelected to be the president of the United States for the following years has outlined various protectionist policies that he plans to pass which will further harm the German economy. Trump has no intention to remove the current tariffs on foreign metals and has further proposed a general 10% tariff on all imports and a significant tariff on foreign-made vehicles. These proposed tariffs will greatly increase export costs making German goods a substantial amount less competitive in US markets and may force German automobile manufacturers to relocate to the US, which would greatly harm Germany’s export-based economy. These proposed tariffs, if imposed, will undoubtedly further strain US-EU relations and result in further retaliatory measures from the EU, worsening international cooperation and uncertainty for businesses.
China is Germany’s largest non-EU trading partner with €106 billion worth of goods exported from and €192 billion worth of goods imported to Germany in 2022. Trade between China and Germany has grown immensely over the last decades due to China solidifying itself as an industrial powerhouse and Germany’s large role in manufacturing. Countless considerable German firms such as Volkswagen, Siemens, and BASF — who compete in diverse industries — have large markets in China, where they produce and supply their products. China has thus become important to German firms not only due to sales but also as a manufacturing hub. Recently this importance has begun to raise concerns over whether Germany is over-dependent on China and the potential issues that could arise. The overall reliance on China and its economy results in a weakening German economy during slowdown periods in China. This can be seen during the real estate crisis which harmed consumer and industrial activity or during the COVID-19 pandemic where disruptions in Chinese manufacturing led to delays and shortages in German industries. To make matters worse, Trump’s reelection policy is heavily focused on reducing American reliance on Chinese goods and economic ties between the two countries are likely to be severed. This can undoubtedly have indirect effects on the German economy as fewer American imports from China could reduce Chinese imports from Germany, realign supply chains, and result in geopolitical tensions where Germany will be forced to choose a side. Recognizing their potential over- dependence, in 2023 Germany introduced the China Strategy which aims to diversify trade partners, strengthen their supply chain resistance, and safeguard their critical industries. This strategy looks to accomplish this by encouraging the investment of German companies in alternative markets, expanding trade agreements with other countries, incentivizing critical good production domestically, and tightening regulations on Chinese investments. This is a part of the modern German plan to maintain an economic relationship with China while reducing their long- term dependency on the country, which aligns with broader EU efforts.
Lastly, the recent German federal elections resulted in the far-right Alternative for Germany (AfD) receiving 16% of the vote. The rise of the AfD, whose vote increased by 4.9% compared to the previous elections, displays the German population’s increasing discontentment with EU fiscal and migration policies. This party opposes any form of deeper EU integration such as shared debt or recovery funds, and their influence could prevent Germany, which traditionally has been corroborative of such fiscal policy, from continued EU support. If the AfD presence continues to increase, Germany may be forced into a more isolationist stance, greatly harming its approval of EU policies and already strained EU relations with world powers such as Russia and China. Furthermore, this has the potential to influence other countries to follow suit and poses a large threat to EU unity.
An Application: German and Eurozone Debt Capital Markets Outlook
As of market close on November 29th, German 10-year sovereigns yield 2.09%. At this figure, the bund yield finds itself among the lowest among developed European countries, larger than only Sweden and Denmark by 30 basis points. Spreads between German and other European yields are hitting highs, with the France-Germany 10-year spread greater than 80 basis points.
The low bund yield is powered in large part by the creditworthiness of Germany as a sovereign issuer, as Germany has a very high level of fiscal responsibility. Due to the German debt brake, Germany’s debt-to-GDP ratio at 62% lags far behind Eurozone counterparts such as Belgium, France, Italy, and Spain, who all post 100%+ debt-to-GDP ratios. As discussed previously, German fiscal rigidity seems to already have one foot in the door due to urgent calls for fiscal stimulus. As a result, German sovereign bond issuance could see an uptick, and since bond price is inverse to yield, yields will likely go up. Even though the ECB plans to cut rates in December, it seems that the US Federal reserve is comfortable with not returning to the low interest rates of 2021-22.
As a result, there is decent reason to believe that German Bund yields will rally in 2025. Ultimately, it will rely on the fiscal policy of the next cabinet in Berlin.
As discussed, the trajectory of German bund yield is uncertain, as it relies on the outcome of the German election and external geopolitical and inflationary pressures, such as US monetary policy, trade wars with the US and China, and wars in Ukraine and th Middle East.
The same uncertainty applies for Eurozone bond yields generally, as the failure to pass a budget could lead to Barnier and the incumbent French government collapsing. As mentioned, Italian and Spanish debt levels are at alarming levels, especially following 10 billion stimulus in Spain in response to natural disasters in Valencia. Generally, as borrowing costs continue to stay high, there is a general sense of unpredictability in Eurozone bond markets.
As a result, banks will have a lot of work to do in terms of servicing clients with products that can help them prepare for volatility. For example, a German-based corporation will look for a product such as an option to prevent exposure to an uptick in Bund yields, which would raise corporate bond yields and in turn, borrowing costs. Another client might be a pension fund, which has massive exposure to investment grade fixed-income securities such as government bonds due to its appetite for safe and consistent long-term returns. A pension fund could look for a product like an interest rate swap, to lock in a floating interest rate and thus reap profits incurred by rising yields.
Along with providing clients with serviceable products that will help them navigate the uncertainty of Eurozone and German fixed income markets, banks will have to exercise strong soft skills in guiding their clients through uncertain times in Europe’s macroeconomic scene. Understanding the future of borrowing costs, along with German fiscal, monetary, and trade policy is essential to corporates with activity in Germany. As a result, banks will have to provide accurate and insightful macro research to their clients.
The capital-raising side of investment banking will be very busy in the coming months, as it will have to monitor the markets to best advise clients on when to issue debt.
From a markets standpoint, the now seems like a good time for German and Eurozone issuers. Debt capital markets activity has already picked up on the back of low Bund yields at 2.09% and with falling ECB rates. Furthermore, corporate investment grade – sovereign spreads are low in Europe and at all-time lows in America.
However, from a non-markets perspective, there is also a regulatory argument to be made for waiting to issue debt. Almost all parties in the German election, including the more status-quo FDP, believe in the goal of a European Capital Markets Union (CMU). Their call is echoed by economic leaders throughout Europe such as Draghi and Lagarde. As a result, it seems that capital markets regulation will loosen in the coming year, and European capital markets will prosper. Therefore, it can also be said that it is preferable to wait to issue debt in better market conditions, rather than doing so in Europe’s currently illiquid, inefficient, and overregulated capital markets.
Because of these conflicting pressures and volatile times, investment bankers will have to be very precise in deciding the best debt-issuing course of action for their clients.
Another adverse effect that rising bund yields could have on corporate debt issuance is by spurring the popularity of private credit solutions in Europe. As Blackstone president Jon Gray recently said, speaking at an event with Steve Forbes, the US alternatives space is “oversaturated”, while there is still trailblazing to be done in Europe. If German sovereign issuance skyrockets and Bund yields jump, along with a coupled wave of Eurozone debt crises, borrowing costs in Europe could reach high levels again. As exemplified in America over the past two years, private credit can flourish under high borrowing costs, since corporates and financial sponsors need creative financing solutions such as PIK loans and floating interest rates. In summary, higher bund yields will force European sell-side bankers to originate more creatively. Banks will have to improve relations with private credit funds along the lines of Citi’s recent partnership with Apollo in order to be able to provide clients with more comprehensive solutions. The future of European debt capital markets and private credit is a situation to closely monitor heading into February’s election.
As of market close on November 29th, German 10-year sovereigns yield 2.09%. At this figure, the bund yield finds itself among the lowest among developed European countries, larger than only Sweden and Denmark by 30 basis points. Spreads between German and other European yields are hitting highs, with the France-Germany 10-year spread greater than 80 basis points.
The low bund yield is powered in large part by the creditworthiness of Germany as a sovereign issuer, as Germany has a very high level of fiscal responsibility. Due to the German debt brake, Germany’s debt-to-GDP ratio at 62% lags far behind Eurozone counterparts such as Belgium, France, Italy, and Spain, who all post 100%+ debt-to-GDP ratios. As discussed previously, German fiscal rigidity seems to already have one foot in the door due to urgent calls for fiscal stimulus. As a result, German sovereign bond issuance could see an uptick, and since bond price is inverse to yield, yields will likely go up. Even though the ECB plans to cut rates in December, it seems that the US Federal reserve is comfortable with not returning to the low interest rates of 2021-22.
As a result, there is decent reason to believe that German Bund yields will rally in 2025. Ultimately, it will rely on the fiscal policy of the next cabinet in Berlin.
As discussed, the trajectory of German bund yield is uncertain, as it relies on the outcome of the German election and external geopolitical and inflationary pressures, such as US monetary policy, trade wars with the US and China, and wars in Ukraine and th Middle East.
The same uncertainty applies for Eurozone bond yields generally, as the failure to pass a budget could lead to Barnier and the incumbent French government collapsing. As mentioned, Italian and Spanish debt levels are at alarming levels, especially following 10 billion stimulus in Spain in response to natural disasters in Valencia. Generally, as borrowing costs continue to stay high, there is a general sense of unpredictability in Eurozone bond markets.
As a result, banks will have a lot of work to do in terms of servicing clients with products that can help them prepare for volatility. For example, a German-based corporation will look for a product such as an option to prevent exposure to an uptick in Bund yields, which would raise corporate bond yields and in turn, borrowing costs. Another client might be a pension fund, which has massive exposure to investment grade fixed-income securities such as government bonds due to its appetite for safe and consistent long-term returns. A pension fund could look for a product like an interest rate swap, to lock in a floating interest rate and thus reap profits incurred by rising yields.
Along with providing clients with serviceable products that will help them navigate the uncertainty of Eurozone and German fixed income markets, banks will have to exercise strong soft skills in guiding their clients through uncertain times in Europe’s macroeconomic scene. Understanding the future of borrowing costs, along with German fiscal, monetary, and trade policy is essential to corporates with activity in Germany. As a result, banks will have to provide accurate and insightful macro research to their clients.
The capital-raising side of investment banking will be very busy in the coming months, as it will have to monitor the markets to best advise clients on when to issue debt.
From a markets standpoint, the now seems like a good time for German and Eurozone issuers. Debt capital markets activity has already picked up on the back of low Bund yields at 2.09% and with falling ECB rates. Furthermore, corporate investment grade – sovereign spreads are low in Europe and at all-time lows in America.
However, from a non-markets perspective, there is also a regulatory argument to be made for waiting to issue debt. Almost all parties in the German election, including the more status-quo FDP, believe in the goal of a European Capital Markets Union (CMU). Their call is echoed by economic leaders throughout Europe such as Draghi and Lagarde. As a result, it seems that capital markets regulation will loosen in the coming year, and European capital markets will prosper. Therefore, it can also be said that it is preferable to wait to issue debt in better market conditions, rather than doing so in Europe’s currently illiquid, inefficient, and overregulated capital markets.
Because of these conflicting pressures and volatile times, investment bankers will have to be very precise in deciding the best debt-issuing course of action for their clients.
Another adverse effect that rising bund yields could have on corporate debt issuance is by spurring the popularity of private credit solutions in Europe. As Blackstone president Jon Gray recently said, speaking at an event with Steve Forbes, the US alternatives space is “oversaturated”, while there is still trailblazing to be done in Europe. If German sovereign issuance skyrockets and Bund yields jump, along with a coupled wave of Eurozone debt crises, borrowing costs in Europe could reach high levels again. As exemplified in America over the past two years, private credit can flourish under high borrowing costs, since corporates and financial sponsors need creative financing solutions such as PIK loans and floating interest rates. In summary, higher bund yields will force European sell-side bankers to originate more creatively. Banks will have to improve relations with private credit funds along the lines of Citi’s recent partnership with Apollo in order to be able to provide clients with more comprehensive solutions. The future of European debt capital markets and private credit is a situation to closely monitor heading into February’s election.
An Application: Equity Capital Markets Outlook
The response of Germany’s equity markets hangs on which political players emerge victorious in the February elections. On the one hand, FDP’s and CDU/CSU’s pro-business agenda of deregulation and lower corporate taxes would spur higher margins and increased investor activity. Moreover, the improved outlook on equities would likely rejuvenate demand for structured German equity products and drive participation in secondary markets. On the other hand, an AfD or SPD-led coalition would bring concerns over populist measures and excessive protectionism, causing market uncertainty for Germany’s industrial and automotive exports. Such a scenario provides appeal to hedging instruments, such as VDAX derivatives and structured notes, as investors will be looking to protect their portfolios from increased market movements, particularly in trade-sensitive equities. Finally, a coalition with The Greens would solidify Germany’s green sector expansion, offering increased sell-side opportunities for thematic products targeting green energy and ESG-compliant investments. With ETFs serving as the summation of broader German equity shifts, they will move accordingly to which policy package becomes the status quo.
The response of Germany’s equity markets hangs on which political players emerge victorious in the February elections. On the one hand, FDP’s and CDU/CSU’s pro-business agenda of deregulation and lower corporate taxes would spur higher margins and increased investor activity. Moreover, the improved outlook on equities would likely rejuvenate demand for structured German equity products and drive participation in secondary markets. On the other hand, an AfD or SPD-led coalition would bring concerns over populist measures and excessive protectionism, causing market uncertainty for Germany’s industrial and automotive exports. Such a scenario provides appeal to hedging instruments, such as VDAX derivatives and structured notes, as investors will be looking to protect their portfolios from increased market movements, particularly in trade-sensitive equities. Finally, a coalition with The Greens would solidify Germany’s green sector expansion, offering increased sell-side opportunities for thematic products targeting green energy and ESG-compliant investments. With ETFs serving as the summation of broader German equity shifts, they will move accordingly to which policy package becomes the status quo.
An Application: M&A Outlook
From an M&A perspective, a similar pattern emerges. Increased protectionist measures would hinder cross-border M&A activity. We already got our first taste with the block on UniCredit’s move on Commerzbank. It challenges the EU’s ambition of bank consolidation, which analysts have long argued to be a vital step for the region to regain competitiveness and close the gap with the US. Consequently, the spillover effects of such policy are likely to be felt in other industries and shake investor confidence. Yet, it may bring a wave of domestic consolidation in vital sectors like manufacturing and technology; as well as boost advisory demand for alternative pivots, including joint ventures and alliances. The green sector expansion promises increased M&A activity in renewables, but most importantly EVs, which may inject life into the sluggish German automotive sector and aid its conversion away from Chinese suppliers. Nevertheless, the task has added a further layer of complexity given the EU’s poster child for domestic EV battery production, Northvolt’s, bankruptcy filing last week.
From an M&A perspective, a similar pattern emerges. Increased protectionist measures would hinder cross-border M&A activity. We already got our first taste with the block on UniCredit’s move on Commerzbank. It challenges the EU’s ambition of bank consolidation, which analysts have long argued to be a vital step for the region to regain competitiveness and close the gap with the US. Consequently, the spillover effects of such policy are likely to be felt in other industries and shake investor confidence. Yet, it may bring a wave of domestic consolidation in vital sectors like manufacturing and technology; as well as boost advisory demand for alternative pivots, including joint ventures and alliances. The green sector expansion promises increased M&A activity in renewables, but most importantly EVs, which may inject life into the sluggish German automotive sector and aid its conversion away from Chinese suppliers. Nevertheless, the task has added a further layer of complexity given the EU’s poster child for domestic EV battery production, Northvolt’s, bankruptcy filing last week.
Written by: Andrea Cavenago, Sava Neskovic, Roberts Rancans, Sal Vassallo
Bibliography
- Reuters
- Financial Times
- The Guardian
- Deutsche Welle
- AA
- Le Monde
- Destatis Statistisches Bundesamt
- Eurostat
- GTAI
- Tax Foundation
- Politico
- United States Trade Representative
- OEC
- IFO Institute
- Interview w Christian Lindner
- Interview w official from Ministry of Finance
- Bundesbank chair talks about need for reforms
- Ford shutting down 4,000 jobs in Germany
- Olaf Scholz "begging" Serbian President to advance lithium mining efforts in Serbia