Germany’s parliamentary elections are over, with Europe’s largest economy getting a new government after years of sluggish performance. Germany is Romania’s most important economic partner, accounting for 19% of exports,writes eToro analyst for Romania, Bogdan Maioreanu.
Many Romanian industries remain closely tied to the situation in German industry. It is therefore worth considering how the outcome of the German elections will affect the economy. Currently, the German economy is still in recession but the DAX index has recently been hitting consecutive all-time highs as investors see Europe as an undervalued market and trust its future growth prospects despite its current problems.
From the perspective of the financial markets, the 2025 Bundestag elections have already been largely factored into current stock prices. Investors have monitored political developments for months, and markets react in advance rather than waiting for election day. The CDU/CSU conservative bloc led by Friedrich Merz won the elections, while the far-right AfD is in second place but without real chances to participate in a government coalition. The SPD is in third place and the Greens are in fourth position with Linke (Left) following.
Germany’s GDP fell by 0.2% in 2024, following a 0.3% contraction in 2023. We see a paradox: while Germany is not short of economic resources or know-how, yet their economic model is running out of steam, and uncertainty is hindering growth and making it harder to exit the crisis. To return to a growth path, Germany needs an urgent economic recovery program. The winner, conservative leader Friedrich Merz reiterates that he wants his government in place by Easter at the latest. This is an ambitious goal as, most likely, he needs to negotiate with two parties to secure a majority in parliament in a three-way alliance.
Key policies are expected from the new government. Under a rule known as the “debt brake” – introduced in 2009 by Angela Merkel following the global economic crisis – the federal government is required to limit annual borrowing to 0.35% of GDP. Some analysts expect minor fiscal loosening, which could be supportive for equities but constrained in scope. At the same time, it should be emphasized that Germany remains relatively low in debt compared to other major world economies. The United States, the United Kingdom, Japan, Italy, France, and Canada are all struggling with public debt exceeding 100% of GDP. Meanwhile, Germany’s debt is projected to reach 62.7% of GDP this year and decline to 61% next year—only slightly higher than in Romania, where the estimated public debt at the end of 2024 stood at around 53% of GDP.
The current weak industrial output, exacerbated by China’s slowdown and high energy costs, has made reinvestment a central agenda item, with potential targeted support for manufacturing and automation. Also by 2030, around 372 billion euros will be needed for infrastructure, roads, bridges, and rail alone. Such investments support growth, create jobs, and enhance Germany’s attractiveness as a business location. As the economic model based on cheap Russian natural gas is no longer available, investors are also questioning whether Germany will continue to rely solely on renewable energy sources or reconsider its policy on nuclear power. High energy prices remain a significant burden for the German economy.
There are also expectations for tax reforms. The CDU/CSU bloc proposes corporate tax cuts from 30% to 25%, which could enhance earnings for DAX-listed firms. This change could boost Germany’s investment by 1.4%, GDP by 1%, and wages by 0.8%, according to estimates of Tax Foundation Europe. As the rising living costs and a housing crisis have squeezed consumers, most likely we will see discussions on boosting affordable housing and reducing bureaucratic hurdles, potentially impacting real estate and retail sectors.
Despite the troubles in the German economy, in the week leading up to the Bundestag elections, the DAX index was breaking record after record, being up 28.31% in the past 12 months and up almost 12% from the beginning of the year, much more than the S&P 500 index which is up only 2% this year. This discrepancy arises because companies listed in the DAX generate the lion’s share of their revenue abroad, in markets where economic conditions (for instance, in the U.S., the Netherlands, France, China or Poland) are more favorable than in Germany.
Current predictions point to a future government coalition CDU/CSU with SPD and most likely the Greens. But Germany has a long history of such coalitions, which, however, have rarely led to profound reforms. After the official results of the elections, the period of negotiations and the formation of a government is a process that the investors should monitor closely as the complicated geopolitical situation, the Trump economic war and his peculiar foreign policy might complicate Europe’s economic and security future.
_
