(sorry for typos etc. they will be righted in the report version)
On balance this was an ok result. Not a dream ticket, But one that will begin to move Germany towards econimic revival. Among European equities Germany is an overweight/long. Long Bunds are to be avoided as one way or another issuance is set to rise,
Now to the elections!!!!
Turnout was a massive 83.5% compred to 76.4 % in 2021.
The election results are still preliminary. The AFD, with which no other party will deal, doubled their vote to 20.5%. If they are not to get into power five years hence, the new German government has to do a lot better on the economy. You cannot "Brand Mauer" a populist party forever, unpalatable though it may be, if doing so just makes it more popular. AfD voting pattern demonstrates that the lower income groups are the bedrock of their support.
The election results show the CDU/CSU with 28.5% and the SPD with 16,5%. The FDP looks like it didn't make the 5% minimum to be represented in the Bundestag. Ex communist - now racist - Bundnis Sahra Wagenknecht looks like it did (vote forecast at the 5% minimum). The Greens were relatively stable at 11.6%.
Our dream ticket opening the door to lifting the debt break would have been a coalition between CDU/CSU, SDP the FDP. It might seem obvious that the SPD-CDU/CSU should now do a deal with the Gruene with 11.9% of the vote. That would get them 56.6% of the (preliminary) vote- very close to the 2/3rds majority need to rewrite the Grunedgesetz and raise th debt break. But this is a tough coalition to broker as the Gruene refuse to prolong the 2035 ban on petrol autos (ananthema to the CSU, which did very well in Bavaria) and are also against restarting the nuclear electricity plants, Restarting the nuclear pants is needed to give Germany cheap power and is at the core of economic reform.
So what have we got?
1. a government that has the right ideas about reform and i fully aware of the need to invest in German infrastructure and at an EU level as well as defence. With debt to GDP of 62% if has ample fiscal space to do so,
2. Implementing reform will be slower and more poltical than desired. But the direction will be ok.
3. Defense will be a priority. It is likely that Merz will push for this to be funded at an EU level. I suspect that other EU level invelstments will follow to implement the Draghi/ Letta proposals. Merz has already talked about the necessary extension of the French and UK nuuclear shield to cover all of European NATO (presumably as NATO Treaty C lause 5 is/was supposed to do).
4. the Grand Colition Government may be able to form a momentary alliance with the Gruene (plus about 10 other votes) to get the debt brake lifted (Art 109 & 115 of the Grundgesetz). If not, there are other ways to skin a German Katz (e.g. setting up external fund to the budget financed by (incl EU) grants).
5. it will probably take until April to form a government. A lot of things could happen before then and it is not good that Germany is in a poltical vacuum.
On balance the recommendation to overwight Germany equities stays. I would avoid long Bunds for the moment as issuance is set to rise.