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Analysis-Left or right, German election leaves investors braced for more spending By Reuters


© Reuters. Social Democratic Party (SPD) top candidate for chancellor Olaf Scholz, Mecklenburg-Western Pomerania state Prime Minister Manuela Schwesig and SPD member Franziska Giffey hold flower bouquets at their party leadership meeting, one day after the general e

By Yoruk Bahceli and Dhara Ranasinghe

(Reuters) – The purse strings have been loosened and will stay that way, no matter who heads Germany’s new government. This is the consensus of investors, who expect to see gains in segments like green finance and modestly higher yields on bonds.

Following Sunday’s defeat of CDU/CSU by Finance Minister Olaf Scholz (centre-left Social Democrats) in Sunday’s elections, both parties will try to woo the Greens (FDP), and pro-business Free Democratic Party(FDP), into forming a coalition.

A potential coalition of Social Democrat-led parties has been dubbed “traffic light” due to the similarities in their colours. The conservative-led coalition was named after Jamaica’s flag.

This may prove to be the most significant difference in the two parties’ positions for investors. The FDP wants an immediate return to the debt “brake”, which caps new federal borrowing. However, other parties expressed an interest in spending more flexiblely.

The Greens seem to want to join the coalition. Anna Stupnytska from Fidelity international, global macroeconomist, said, “It seems that the Greens are going to be part of the coalition…

According to her, the “traffic light” option with the Social Democrats and Greens as well as FDP is the most favorable option for markets. She also believes that it represents an actual change from the politics of recent decades.

The coalition’s higher spending is likely to boost public investment, which will support economic growth.

CDU is Germany’s ruling party since 2005. This period was marked by austerity in Germany and the rest of Europe, critics claiming that it has hindered public investment. However, the COVID-19 epidemic that struck in March 2020 led to increased spending.

The record-breaking borrowing last year was used to finance the spending boom, which reached a peak of 130 billion euro in 2020 and soared up to 240 million euros by 2021. In 2022, the Constitution mandated borrowing limit will be lifted for the third consecutive year to permit borrowing of 99.7 trillion euros.

Graphic: German debt level still lower than major peers:

Thomas Kruse, chief investment officer for Germany at Amundi, said an SPD-led coalition could unleash more government spending but a conservative-led grouping was likely to stimulate private sector investment via tax cuts, favouring equities either way.

Kruse will look for opportunities to invest in companies that can benefit from a faster green transition, as the Greens are key members of either coalition.

He said that spending will increase in general.


There are some differences between the parties that must be resolved, particularly for the Greens and the FDP, who will hold talks seeking compromise before negotiations with the other parties.

Like the SPD, the Greens have pledged that they will “reform” debt brakes and favor higher taxes for the rich. CDU pledges not to increase income taxes, and wants cuts for businesses. FDP supports tax cuts for rich individuals and corporations.

It is possible that there could be disagreements about housing reform or the speed of decarbonization.

“The outcome of the negotiations is likely to lead to movements in utilities and property shares,” said Marco Willner, head of investment strategy at NN (NASDAQ:) Investment Partners.

Investors believe that the spending rises won’t have an adverse impact on bond markets due to the support from the European Central Bank. As the SPD has strengthened its lead in yields, it is due to inflation data as well as jitters about monetary policy. Analysts pointed out that yields have been rising over recent weeks.


Prospects for increased German spending come as European Union budget rules are under review ahead of their reinstatement in 2023 — a focus for those invested in heavily-indebted Southern European bonds.

CDU and FDP both want the EU to return to its strict budget rules. The SPD, however, supports keeping these rules in place because they allow for future crisis management. SEB economists stated that a SPD/Green-led coalition would “lessen pressure on EU members to cut their budget deficits more quickly.”

Graphic: Euro zone bond spreads since the COVID-crisis:

Finally, German voters’ rejection of the Left Party as well as the far-right AfD is seen as a good sign for Europe, with French presidential elections due next year.

Hans-Joerg Naumer (DE: Global Investors), senior investment strategist, Allianz, stated that no matter what the coalition is, it would be euro-friendly.