Barclays (LON:BARC) analysts projected that the snap elections held in Germany on February 23 will likely lead to the formation of a coalition government. The current political landscape in Germany is highly fragmented, suggesting that establishing a coalition could take several months.
According to recent polls, the most probable outcome is a government led by the CDU/CSU (conservatives) in partnership either with the SPD (social democrats) or the Greens (environmentalists), as all parties have excluded the possibility of working with the AfD.
The election manifestos have placed a strong emphasis on economic policies. The CDU/CSU's strategy includes supply-side reforms, cuts in corporate and income taxes, and the repeal of certain laws implemented by the Scholz administration. On the other hand, the SPD and the Greens are advocating for the creation of a new public investment fund and more focused tax rebates for corporate investment.
These measures would be funded by a reform of the German debt brake and increased taxes for higher earners and wealthier segments of society.
Barclays analysts anticipate that the incoming coalition will adopt a pro-growth agenda, which is expected to encompass corporate and income tax reductions, along with tax rebates for private investments. Nevertheless, the specific details of these reforms, particularly regarding their financing and the stance on modifying the debt brake rule, remain uncertain, especially since the CDU/CSU has not divulged comprehensive information on these matters.
The analysts also expect that the new fiscal policy will not hinder German economic growth as it might have under the German Draft Budgetary Plan 2025, which was submitted to the European Commission in October 2024.
While the fiscal policy is not predicted to be as expansionary as the parties' manifestos would imply, it is forecasted to have a slightly positive impact on growth for the years 2025 and 2026, bolstered by contributions from public investment.
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