Germany’s recent election results have impacted global markets, with investors closely watching how conservative leader Friedrich Merz, who won on Sunday, will shape economic and fiscal policies.
For starters, Nigel Green, CEO of global financial advisory firm deVere Group, highlighted the immediate positive reaction from markets: “The euro has strengthened, stocks are climbing, and expectations for fiscal stimulus are on the rise.” He emphasised that Germany’s prolonged economic contraction has heightened calls for policy shifts. The widely debated ‘debt brake,’ which limits structural budget deficits, is under scrutiny, with investors anticipating increased government spending, particularly in defence.
The defence sector is already seeing tangible benefits, according to asset managers. Green highlighted that “German defence stocks have had a strong start to 2025, with firms positioned to gain from a government committed to military expansion.” This aligns with broader European rearmament efforts, driven by geopolitical uncertainties, including US foreign policy unpredictability and Russia’s strategic manoeuvres, added Green.
The critical nature of Germany’s defence policy under Merz will be a space to watch, agreed Tom Bailey, head of research at ETF provider HANetf. “The centre-right Christian Democrat party emerged as the winner of Germany’s election. The expected next chancellor of Germany, Friedrich Merz, wasted no time in addressing Europe’s most pressing issue: defence. Merz was frank in his comments, arguing that the Trump government does ‘not care much about the fate of Europe’ and speculated whether the North Atlantic Treaty Organisation (Nato) will continue to exist in its current form,” said Merz.
Bailey added that this comes amid serious doubts about the US commitment to European security. “Merz’s comments suggest the new German government is now serious about boosting defence spending to fill the gap potentially left by the US pivoting away from European defence. The next question will be whether the new coalition government in Germany can sufficiently loosen its fiscal rules to boost defence spending.”
Currently, Germany spends just over 2% of its GDP on defence, meeting Nato’s 2014 target, cited HANetf. However, this is increasingly seen as inadequate given the evolving geopolitical landscape. “Mark Rutte, the current head of Nato, has noted spending will have to go higher than 3%, while the Trump administration is demanding 5%. But with the risk of US disengagement from Europe now so acute, this question moves beyond reaching pre-agreed spending targets and instead becomes: how can Europe develop the capability to defend itself without an American defence backstop?” Bailey argued.
Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management, expects a swift coalition formation, likely leading to a grand coalition. “Some ‘green tape’ will be removed, tax cuts will be introduced, and these changes could help kick-start the economy out of recession,” he predicted. However, Hense also underscored that fixed-income markets will be particularly focused on military spending and the potential formation of a European security framework independent of Nato.
Markets have responded favourably to these developments. “Germany’s leading defence company, Rheinmetall, opened today with a gain of 3%. Analysts covering the stock have also recently upgraded their price targets. Similarly, Renk, a German maker of tank parts, has also seen a gain of around 5% this morning,” Bailey noted. He highlights that both companies are included in the Future of Defence Ucits ETF, which has surpassed $1 billion in assets under management less than two years after launch, demonstrating the rapid growth of investor interest in the defence theme.
Germany’s BVI calls for private pensions and market data reform
Mathieu Savary, chief European investment strategist at BCA Research, and David Zahn, head of European fixed income at Franklin Templeton, both offered insights into the economic and market implications of Germany’s election. Savary believes the election outcome will lead to increased military and infrastructure spending, tax cuts, and tighter immigration controls. He predicted that “this vote will help German assets outperform over the coming months” and advises investors to overweight Eurozone banks while using any market pullbacks as buying opportunities.
Zahn, meanwhile, highlighted Merz’s clear shift in focus toward defence policy, particularly his emphasis on strengthening Nato and advocating for a European-led security solution. He pointed out that while this pivot could have long-term geopolitical and economic implications, the immediate market impact is likely to be limited. “Market implications should be limited, as a change to the debt brake remains possible but is unlikely to materialize before next year, if not later,” Zahn added. Given this, he suggested that while investors may see some positive momentum in defence-related sectors, broader fiscal reforms may take longer to unfold.
Despite these market-friendly developments, caution remains regarding fiscal reform. Laura Cooper, head of macro credit and global investment strategy at Nuveen, warned that substantial changes to Germany’s debt brake could remain elusive in the short term. “While pressure to strengthen defence independence could expedite coalition formation, turning up the fiscal taps remains challenging,” she explains. With no blocking minority for constitutional reform, some fiscal flexibility is possible, but meaningful changes may not materialise until 2026.
The euro has already rebounded in response to the election, and further fiscal expansion could strengthen confidence in the single currency. However, as Green pointed out, “The shape of Germany’s next coalition will dictate the extent of fiscal reform, and prolonged negotiations could introduce volatility.” The extent to which Berlin embraces reform will ultimately determine the scale of opportunities for global investors.
