The CDU/CSU under Friedrich Merz won the German elections and will likely form a grand coalition with the SPD. This coalition is seen as market-friendly and pro-growth. In Ukraine, Zelensky offered to step down over the weekend in exchange for peace and Ukraine’s Nato membership.
German Elections – Fiscal Hopes Alive but Cloudy
The CDU/CSU under Friedrich Merz won the German elections with 28.5% and will likely form a grand coalition with the SPD (16.4%) by Easter. The far-right AfD came in second at 20.8%, in line with polls, but will not be part of the government, as all centrist parties have excluded working with them. The surprise was a much stronger Die Linke (left, 8.8%), which now holds a 34% blocking minority together with the AfD in the Bundestag. The smaller FDP (4.3%) and BSW (4.97%) failed to meet the 5% hurdle and will not be in parliament.
For the market two things are important:
- CDU only needs one coalition partner, the SPD, which requires less compromises and allowing for faster coalition negotiations. This coalition is seen as market-friendly and pro-growth.
- CDU/SPD/Greens have failed to obtain a 2/3rds majority in Bundestag required for constitutional changes e.g. debt brake reform, but now instead require votes from Die Linke or AfD to support excess budget spending. There is hence no blank cheque for spending, but under sufficient geopolitical and local economic pressure we still see a path for more German fiscal spending.
Ukraine – Trump turns his back on Zelensky
In a shock to Europe, Trump sent a team to Saudi Arabia following the Munich Security Conference to negotiate directly with Russian officials last week. The conversations excluded Ukrainian or European officials and instead signalled closer relations between the US and Russia ahead. Ukraine rejected an extortionate deal by the US, requesting access to $500bn worth of rate minerals without offering future security guarantees. This angered Trump so much, that the camps rhetoric shifted even more pro Russia, questioning who started the war and hindering G7 language calling Russia the aggressor in the war. Over the weekend, Zelensky offered to step down as president in exchange for peace and Ukraine’s Nato membership.
European Defence – Scrambling for a response
Following Munich, European leaders left scrambling for a European security response amid the pressure of Trump. Among policy circles, leaders are concerned about a scenario in which the US ultimately withdraws troops from NATO territory in Europe and leaves the eastern flank exposed for future Russian aggression, despite a potential peace deal near-term. There’s broad consensus among Europe that defence spending needs to be raised to at least 2.5% of GDP across all member states, with some talking about spending towards 3%. Numbers floated for a European defence package range in the area of 500-700bn, compared to 800bn spent in the response to Covid. The EU is likely to suspend its fiscal rules to allow higher spending on national level first, before potentially exploring common issuance at a later stage.
Algebris Investments’ Global Credit Team
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