Germany's mainstream conservative parties won the national election as the country struggles with fractured European-US relations and significant economic problems at home.

The Christian Democratic Union (CDU) and its sister party won the election with 28.6% of the national vote. The far-right, anti-immigrant Alternative for Germany (AfD) came in second with 20.8% of the votes, gaining public support on concerns about the country's migration policy.

Source: AP

CDU's Friedrich Merz, an old-school conservative who has never held a government role, is set to lead Europe's biggest economy and most populous state. He will try to mend tensions with the Trump administration.

The 69-year-old leader will need to spur the country's economy, raise slowing investments and boost exports. He will also have to mitigate rising public frustration after a string of Islamic extremist attacks.

The rise of AfD has demonstrated voter dissatisfaction with traditional parties.

Merz Vows to Maintain Transatlantic Ties

Merz has vowed to maintain a good transatlantic relationship with the US. He has also said he would unify Europe in the face of challenges coming from the US and Russia.

If the relationship is "destroyed, it will not only be to the detriment of Europe, it will also be to the detriment of America," Merz said. It would be unacceptable "if the Americans strike a deal with Russia over the heads of the Europeans, over the heads of Ukraine," Merz said.

On February 18, Secretary of State Marco Rubio met with Russian Foreign Minister Sergei Lavrov in Riyadh. The discussions focused on establishing a framework for diplomatic normalization and forming US-Russian teams to chart a path to end the war in Ukraine.

There were no European diplomats at the talks.

Merz Pledges to Protect Borders ‘Better'

Immigration was the most pressing problem ahead of the elections, according to polls. As many as 37% of people polled by broadcaster Deutsche Welle pointed to immigration as their most pressing concern, followed by the economy and foreign policy.

There have been two terrorist attacks in Germany so far this year. On February 13, an Afghan asylum seeker rammed a car into a crowd in Munich, killing two and injuring 36, a day before the start of the Munich Security Conference.

“None of us wants to close the borders," Merz said. "But we need to protect our borders better. We must regain control over those who come into our country.”

Merz's CDU won 208 seats in the 630-seat Bundestag, while AfD won 152, AP reported. The three parties in the former coalition lost seats, with the Social Democratic party (SDP) falling to 120 seats and the Greens to 85.

Merz ‘Goes Weakened' into Coalition Talks

Robin Brooks, a senior fellow at the Brookings Institution, called the election result "a disaster."

"CDU underperforms and goes weakened into coalition negotiations with SPD and Greens," he wrote on X. They "undermined CDU’s efforts to restrict immigration and take votes away from AfD," he added.

Germany's main political parties, including the CDU, have said they won't work with AfD, which is under observation by the domestic intelligence agency for suspected right-wing extremism. Merz has pledged to form a government by the end of April.

But for AfD, which was founded 12 years ago, the results were a success. "The change is noticeable," Alice Weidel, the co-leader of AfD, said on X on Tuesday.

"More and more people are realizing that national sovereignty and freedom are the right path for Germany and Europe," Weidel said. "The AfD will resolutely continue on this course!"

German Economy Has to Turn Around, Merz Says

Merz has pledged to restore the German economy. He has called for lower taxes, reducing bureaucracy, and supporting entrepreneurs.

“Taxes must go down so that people have more money in their pockets and businesses can invest,” Merz said. "We have to make it easier for businesses to operate and compete globally. The economy has to turn around, and we need growth again.”

But Europe's biggest economy faces considerable headwinds that may hinder Merz's ambitions. They include, among other things, an aging population, high energy costs, weak productivity and the emergence of China as an industrial rival.

Gross domestic product contracted 0.2% in 2024, data from the Federal Statistical Office (Destatis) showed on Tuesday. Investments fell by 2.7% in the 4th quarter, compared with the same quarter a year earlier, Destatis said.

Source: Bloomberg

In the 4th quarter, exports of goods and services dropped 2.2%, compared with the 3rd quarter, Destatis said. That was the steepest decline since the second quarter of 2020 when most of the world was in lockdown due to COVID-19.

"Germany is in its most prolonged manufacturing contraction in decades, worse than [the] Great Financial Crisis or Covid," Michael A. Arouet, an economy, politics and investing analyst wrote on X. "And this during relatively good times. Next global recession will be brutal for them."

Source: X

The financial deficit (net borrowing) by the German government increased by €15 billion in 2024 to € 118.8 billion from 2023, Destatis said on Tuesday. In 2024, government spending outpaced growth in government revenue.

Markets Initially Welcomed Merz's Election Victory

Markets initially welcomed the results of the election. The euro rallied to a one-month high, edging above 1.05

Germany's mid-cap stock index, which tracks domestically focused companies, rose 1.4%, marking one of its largest daily gains of the year.

But investors are still concerned about the German economy. The spread between German 10-year government bonds and 10-year interest rate swaps has hit a record low on Tuesday.

Source: Bloomberg

This highlights "how much investor sentiment toward German government debt has worsened," Holger Zschäpitz, market expert and author at the German newspaper Die Welt, posted on X.

"Markets expect Germany to either loosen its debt brake or create a special fund, which would lead to more government bonds being issued—raising concerns about oversupply."

Merz's government "cannot easily reverse years of lunatic left green policies," Arouet said.

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