Germany election – Complicated coalition negotiations ahead – economic outcome scenarios

An early-week note from ING on the German election outcome says there are “Complicated coalition negotiations ahead”.

In summary, ING concludes that while coalition dynamics remain uncertain, fiscal policy will be shaped by trade-offs between tax relief, investment flexibility, and spending discipline. Markets will watch closely to see whether economic stagnation is tackled head-on—or whether political fragmentation leads to policy paralysis.

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here is a summarised look at the coalition scenarios and their economic implications and likely market impact outlined in the note.

As Germany navigates coalition negotiations, the economic trajectory will hinge on whether political leaders prioritize growth over party interests. The key question: Will policymakers push beyond ideological barriers to break free from structural stagnation, or will internal divisions stifle reform?

Regardless of the coalition makeup, a tighter stance on immigration appears more likely than consensus on economic policy, particularly as the mainstream parties seek to prevent the far-right AfD from gaining ground in the next election. Here’s how the most probable coalitions could shape fiscal policy and investment:

CDU/CSU & SPD: The Grand Coalition Redux

A revival of the grand coalition would likely focus on tax relief for households and businesses without trimming social spending. While a direct overhaul of Germany’s debt brake remains unlikely, a special-purpose vehicle (SPV) for infrastructure and defense funding appears feasible. This coalition could also signal greater European cooperation in financing major defense and infrastructure projects.

CDU/CSU, SPD & Greens: Fragile but Europe-Friendly

A three-party alliance with the Greens would be politically volatile and unlikely to last a full term. Fiscal policies would mirror the grand coalition, with tax cuts and deregulation, while an SPV for infrastructure and defense spending remains on the table. However, deep divisions over energy policy could sustain high energy costs, weighing on industrial competitiveness. For European integration, this coalition could—albeit with delays—strengthen joint EU funding for defense and infrastructure.

CDU/CSU, SPD & FDP: Fiscal Restraint Takes Center Stage

A coalition with the business-friendly FDP would deliver the same tax relief but introduce a sharper focus on spending cuts. The FDP’s influence would likely curtail investment initiatives, limiting fiscal flexibility. Interestingly, FDP leader Christian Lindner has signaled openness to special-purpose vehicles, but funds would be earmarked primarily for defense rather than infrastructure. In a European context, this coalition would likely mark a return to German fiscal conservatism, tightening the lid on EU-wide spending initiatives.

This article was written by Eamonn Sheridan at www.forexlive.com.