Germany's Political Crossroads: Merz's Second Chance and the Economic Stakes

The political drama surrounding Friedrich Merz’s bid to become Germany’s chancellor has reached a critical juncture. After a historic first-round failure to secure a majority vote in the Bundestag, Merz narrowly succeeded in a second vote on May 6, 2025. The episode underscores a fragile coalition, simmering intra-party tensions, and far-right agitation—factors that will shape Germany’s economic trajectory and investment opportunities in the coming years.

A Coalition on the Brink

The CDU/CSU-SPD coalition holds 328 seats in the Bundestag, just 12 seats above the threshold required to form a government. However, Merz’s first-round defeat revealed deep fractures: 18 SPD MPs defied expectations, withholding support. While the second vote’s success averted immediate crisis, the coalition’s cohesion remains precarious. Analysts warn that unresolved disputes over cabinet nominations, policy compromises, and the SPD’s reluctance to fully align with Merz’s agenda could derail legislative progress.

Economic Policies: Ambition vs. Realities

Merz’s agenda hinges on three pillars: infrastructure modernization, defense spending, and fiscal flexibility. Key initiatives include:
1. €500 Billion Infrastructure and Climate Fund: A decade-long plan to revitalize transportation, energy grids, and renewable projects.
2. Defense Expenditure: Exempt from Germany’s strict debt rules, targeting 2% of GDP by 2027.
3. Corporate Tax Cuts: Aimed at boosting competitiveness amid U.S. trade tariffs and a contracting services sector.

The policies could lift Germany’s GDP growth to 1.8% in 2025, up from 0.7% in 2024, according to analysts. However, risks loom large.

Sectoral Winners and Risks

Winners:
- Infrastructure & Renewables: Companies like Siemens Energy (SIE) and RWE (RWE) stand to benefit from grid modernization and hydrogen infrastructure projects.
- Defense Contractors: Firms such as Thyssenkrupp (TKA) and Hensoldt (HEI) may see increased orders as defense spending rises.
- Tech & Digitalization: Merz’s push for 3.5% GDP on R&D by 2030 could boost SAP (SAP) and cybersecurity firms.

Risks:
- Automotive Sector: U.S. tariffs and Merz’s reluctance to fund EV transitions could hurt exports.
- Geopolitical Tensions: A potential Trump administration and EU-China trade disputes may disrupt supply chains.
- Far-Right Influence: The AfD’s 20.8% share could obstruct migration and energy policies, creating regulatory uncertainty.

Political and Geopolitical Risks

The SPD’s weakened position—having lost 6 million voters—limits Merz’s ability to push through reforms. Meanwhile, the far-right AfD’s pro-Russia stance risks straining transatlantic ties, particularly over Ukraine support. A 0.5% GDP contraction is projected if coalition infighting or trade tensions escalate.

Conclusion: A High-Reward, High-Risk Play

Investors should balance optimism over fiscal stimulus with caution toward political fragmentation. Sectors tied to infrastructure, defense, and tech—like SIE, TKA, and SAP—are positioned to benefit from Merz’s agenda. However, the coalition’s razor-thin majority and the AfD’s influence amplify risks of legislative gridlock and policy reversals.

Germany’s GDP growth hinges on Merz’s ability to execute his vision while navigating a volatile political landscape. With 1.8% growth on the table, but 0.5% contraction a possibility, investors must monitor coalition cohesion and geopolitical developments closely. The next 12 months will determine whether Merz’s “second chance” delivers stability or deepens uncertainty.

In short: Germany’s economy is at a crossroads. Investors should prioritize defensive plays in infrastructure and defense while hedging against political volatility. The stakes are high, but so are the rewards—if Merz can hold his coalition together.