CDU win could see German defence spending boost - Deutsche Bank
By Frank Prenesti
Date: Monday 24 Feb 2025
(Sharecast News) - The prospect of a two-party coalition government in Germany could provide a boost for defence spending and be well received by the corporate sector, analysts from Deutsche Bank said on Monday after the federal election.
Latest results show the Christian Democratic Union and Christian Social Union alliance (CDU/CSU) won a combined 28.6% of the vote, with the far-right AfD second on 20.8% and incumbent Chancellor Olaf Scholz's Social Democratic Party (SPD) third with 16.4%.
CDU leader Friedrich Merz is likely to become the new chancellor and form a government with the SPD, having ruled out any involvement with the AfD.
In a note to clients, Deutsche Bank said a coalition with the SPD-formerly known as a 'grand coalition'- "is the only viable" choice.
"Having only one option may limit the conservatives' leverage in negotiating tax cuts and supply side reforms. At the same time however the prospect of a two-party coalition led by a strong CDU/CSU will likely be seen as a positive by Germany's corporate sector, promising less policy gridlock and uncertainty than under the outgoing government," they said on Monday.
"In our view, Europe's challenged security architecture makes it highly likely for CDU/CSU and SPD to agree on higher defence spending in principle. Foreign policy developments over the last fortnight have provided a political pivot for both parties to commit to greater defence spending."
'TRICKY' TALKS & THE DEBT BRAKE
New US President Donald Trump has demanded European states spend more on defence, while at the same time appearing to side with Russia on plans for a post-war settlement in Ukraine.
"Although a new (spending) target may be formulated only after the NATO summit in June, we would assume that defence spending will likely rise to at least 2.5% of GDP over the next term, with a meaningful increase as early as 2026," DB said.
However, the mechanism to finance this was a "tricky question", they added noting that the changes to the country's so-called "debt brake" - a constitutional limit on borrowing which holds annual structural deficits at 0.35% of GDP - would need support from one of the fringe parties to obtain the required two-thirds majority in parliament.
"This is not impossible, but it would require significant political compromises," they said.
Europe's largest economy contracted for a second straight year in 2024, with critics blaming the debt brake for years of underinvestment.
The CDU, SPD and Greens do not have the numbers without the help of Die Linke (Left Party) failed to gain the required majority needed to either change the rule or launch special funds to increase spending outside its scope. However, the Left Part is opposed to any increase in defence spending.
"Theoretically, there could therefore be a cross-party consensus with the Left on setting up an off-budget infrastructure fund or exempting infrastructure investment from the debt brake to create more room for defence spending in the core budget," DB said.
"This would probably still constrain the extent of additional defence expenditure in the next term, but it would at least create some room for manoeuvre."
Reporting by Frank Prenesti for Sharecast.com
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