Germany's New Direction: Merz's Leadership and the Investment Landscape

The election of Friedrich Merz as Germany’s chancellor marks a transformative moment for Europe’s largest economy, with profound implications for investors. The conservative coalition’s narrow victory—and the far-right Alternative für Deutschland (AfD)’s meteoric rise—has set the stage for a political climate that blends economic ambition with ideological tension. For investors, the path forward hinges on Merz’s ability to execute his agenda while navigating domestic and international headwinds.

Economic Policies: A Focus on Infrastructure and Defense

Merz’s “Responsibility for Germany” coalition has unveiled a bold economic plan centered on a €500 billion infrastructure and climate fund, exemptions for defense spending from debt rules, and reforms to streamline industries like rail operator Deutsche Bahn. These policies aim to boost competitiveness, modernize critical sectors, and position Germany as a leader in green technology.

The infrastructure fund, allocated over a decade, could catalyze growth in construction, renewable energy, and transportation. Sectors like construction (e.g., HOV, SIE) and utilities (e.g., ENW) stand to benefit directly. Meanwhile, the relaxation of debt rules for defense spending—projected to rise to 2% of GDP by 2027—could buoy defense contractors such as Thyssenkrupp (TKA) and Hensoldt (HEI).

Industry Implications: Winners and Risks

• Infrastructure and Renewables: The €500 billion fund is likely to prioritize projects like grid modernization, hydrogen infrastructure, and urban transit. Siemens Energy (SIE) and RWE (RWE) could see sustained demand for green technology and grid upgrades.
• Defense and Aerospace: With defense spending exempted from debt caps, companies like Airbus (AIR) and Rheinmetall (RHM) may gain from increased procurement.
• Transportation: Deutsche Bahn’s reforms, including competition to its rail network, could spur private investment in logistics and passenger transport.
• Technology: Merz’s push for digital infrastructure could benefit IT giants like SAP (SAP) and cybersecurity firms.

However, political risks loom large. The AfD’s rise—now the second-largest party—threatens to slow legislative progress, particularly on immigration and foreign policy. Its pro-Russia stance could complicate relations with the U.S. and Ukraine, potentially destabilizing supply chains.

Political Risks: A Narrow Majority and Rising Far-Right Influence

The coalition’s 328-seat majority—barely above the 326 threshold—leaves little room for dissent. The SPD’s weakened position, after losing 6 million votes, may limit Merz’s flexibility on fiscal issues. Meanwhile, the AfD’s 20.8% share has emboldened its demands, including a reversal of migration policies and closer ties to Russia.

Investors should monitor the AfD’s legislative influence, as its opposition could disrupt key initiatives. A underscores its growing clout, which could pressure Merz on issues like border controls and energy policy.

Global and Geopolitical Tensions

Merz’s vision of European “independence” from U.S. security guarantees aligns with France and Poland but risks fraying transatlantic ties, especially under a Trump-led White House. This could create uncertainty for U.S.-based multinationals in Germany, though European partnerships in defense and tech may offer alternatives.

Conclusion: A High-Reward, High-Risk Landscape

Merz’s government presents a compelling investment narrative: a fiscal boost to infrastructure, defense, and green tech could fuel GDP growth to 1.8% in 2025 (up from 0.7% in 2024), per projections. Sectors like construction, renewables, and defense are poised for gains, with companies such as Siemens and Thyssenkrupp well-positioned to capitalize.

However, the narrow coalition and AfD’s influence pose significant risks. Investors must weigh the upside of Merz’s ambitious agenda against the potential for legislative gridlock and geopolitical volatility. With the far-right now a mainstream political force, Germany’s stability—and its investment appeal—will depend on how Merz balances fiscal expansion with political survival.

In this environment, sectors tied to infrastructure and defense offer the clearest opportunities, while companies exposed to transatlantic tensions or immigration policies face headwinds. For now, the watchword remains: cautious optimism.