The most delicate irony of the German election aftermath
And how it ties to the recently strong stock market performance in Germany.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
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TLDR Summary
Germany has a so called debt brake in its constitution that limits deficit spending to 0.35% of GDP. Politicians have been gaming this rule for years. A court ruling in late 2023 made this game more challenging. Disagreement on how to deal with it broke the coalition late last year. Chancellor Scholz had demanded more creativity to enable more spending. Finance minister Lindner refused. And got fired.
The court ruling was the result of a legal challenge initiated by CDU/CSU, the party of Sunday’s election winner Friedrich Merz. He got this election and the victory by defending the debt brake.
And now, one of his first moves will likely be to destroy it. He has not stated that clearly yet. He is talking only about fine tuning it (how on earth would that look like anyway?). But he intends to form a coalition with SPD, Chancellor Scholz’s party. Together, they plan to spend hundreds of billions more on defense and invest in infrastructure. And they don’t plan to cut pension entitlements that are currently burning a hole of dozens of billions of Euros into the federal budget.
Whatever the death of the debt brake will look like, the most likely outcome is accelerated deficit spending. Including off-budget gymnastics, the federal government is already net spending €200bn annually, about 5% of GDP. We will likely see a step change up with the incoming administration. I believe that is the scenario the German stock market has been playing lately. It’s up 14% YtD. One of the strongest markets in 2025 so far.
What is the election outcome?
Germany has elected a new federal government. CDU/CSU (Christian Conservatives) are the winners and will most likely form a coalition with the SPD (Social Democrats), the party of Chancellor Scholz. Right-wing AfD will be the leading opposition party. They roughly doubled compared to the last election in 2021.
What is ironic about this outcome?
As you may know, Germany put a so called 'debt brake' (Schuldenbremse) into its constitution in 2009 which limits deficit spending to 0.35% of GDP.
Since politicians always like to spend, they have used various creative tricks to circumvent this debt brake. One of those tricks is to establish debt vehicles outside of the budget which they called 'special purpose funds' (Sondervermoegen). There are numerous of those funds and it has become practice to juggle available spending headroom between them to patch holes in the budgets. This has been happening in most years since 2009. By now, these funds have accumulated €800bn in debt to their name. A quarter of all debt ever issued by a German federal government is outside of the federal budget!
One of these tricks was to reallocate €60bn in unused funds from the pandemic relief fund into current spending. In November 2023, the German supreme court declared this move unconstitutional.
This caused great havoc because the coalition had to implement panic cuts to fix the 2024 budget. As examples, the EV subsidy was axed overnight (which killed Tesla's 2024 sales), the grid subsidy was axed (which was supposed to finance the energy transition) and farmer privileges were cancelled. Especially the latter caused large protests. You might remember how a year ago thousands of tractors drove into Berlin.
Where the coalition had been able to navigate 2024 with patches like those mentioned above, 2025 looked much more difficult to do given the court ruling. This problem was amplified by the horrendous demographic set-up. The country currently loses 1% of its workforce every year due to retirement which is a huge burden for its pension system.
They would have had to cut more or find new tricks to spend more. It was exactly this conflict that broke the coalition late last year. Chancellor Scholz had demanded more creativity to enable spending. Finance minister Lindner refused. And got fired. And his entire party (with a long tradition) is history now. They were the only ones that got completely kicked out of the government.
The court ruling in 2023 effectively broke the coalition in 2024. And why did the court rule? Because Merz’ CDU/CSU had sued the government. He got this election and the victory by defending the debt brake.
The irony about this is that one of his first moves will most likely be to scrap it. Hundreds of billions of more spending are anticipated when the coalition between CDU/CSU and SPD forms. They want to massively up defense spending and they want to invest into domestic infrastructure. At the same time, they don’t plan to do anything about the growing hole that the pension crisis is burning into the budget.
Whatever the death of the debt brake will look like practically (a clean solution is most unlikely), the most likely outcome is accelerated deficit spending.
What are the economic consequences?
Germany’s GDP is about €4tn which means the constitution only allows for about €15bn deficit spending annually. In reality, it’s way more than that every year. In 2023, the official deficit was €46bn. However, including the aforementioned special purpose funds, the spending was €193bn, easily 5% of GDP, 10-15x more than constitutionally allowed.
It’s very likely that this will increase substantially in the coming years. And that is most likely the reason why the DAX is up 14% YtD, one of the strongest stock markets of 2025 so far.
Sincerely,
Rene
Government deficits via investment add to GDP (let's say generously it is not ᲇ⋓ǁǁ𝕤ꖲⅈ╬ job creation). They do not carve off a chunk of GDP as most mainstream language framing weaselly implies. This German finagling of the deficits to spend more is a good thing, it is hihgly regrettable it has to be done in such an ꗇꕷꕷ-backwards convolution. But that is the deliberate neoliberal construction of the EMU, it had needless austerity baked-in. It stems from the hysterical (and unsubstantiated) fear of inflation. This fear mongering is a crime against humanity when unemployment is the far greater thing to fear and source of almost all our macroeconomic woes.
Want to know of a human rights crime greater than Gaza genocide attempts? It is all the unemployment we see all around us. Unemployment is a simple and epic tragic government policy mistake. A failure to understand the public purpose of a tax driven currency. The purpose is to deliberately unemploy some percentage of workers, so the state can then immediately hire them all for public purpose out of the private sector. Any residual unemployment is a policy mistake, which is easily corrected with a Job Guarantee buffer policy.