A coalition between the two biggest German parties could be the most fruitful from an economic policy standpoint, since it may make it easier for Germany to reboot economic growth after 2 years of economic contraction.
The euro has climbed to a one-month high, after the centre-right CDU/CSU alliance came top of the German election, with 28.5% of the vote, meaning CDU leader Friedrich Merz will become Germany’s next chancellor – once he has agreed a coalition.
The euro has rallied this morning as European investors express relief over the outcome of Germany’s election – although this is mingled with anxiety over a slump on Wall Street at the end of last week.
Holger Schmieding of Berenberg points out that the AfD (152 seats) and The Left (64 seats) have won more than one third of the 630 seats and can thus veto any changes to the constitution.
Getting The Left to agree to a debt brake reform that is primarily needed to raise defence spending including more help for Ukraine could also be very difficult.
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