Germany’s federal election has delivered a dramatic shift in the country’s political order, as exit polls indicate that the centre-right Christian Democrats (CDU) and their Bavarian sister party, the CSU, secured around 29% of the vote. More shockingly, the right-wing populist party Alternative for Germany (AfD) recorded its highest-ever result, surging to 19.5–20%, nearly doubling its 2021 election outcome. However, the incumbent Social Democrats (SPD) suffered their worst post-war result, collapsing to 16–16.5% of the vote share, reflecting widespread voter dissatisfaction with the current government’s handling of economic stagnation, high inflation, and energy insecurity following the fallout from the Ukraine war.

In the years following the 2021 election, many Germans have grown disillusioned with the SPD-led coalition’s approach to fiscal policy, which has been perceived as ineffective in tackling rising living costs and industrial decline. Additionally, migration concerns have played a key role in shifting voter sentiment, with the AfD capitalising on public unease over border control and integration challenges, while CDU/CSU benefited from a perception of stronger leadership on economic and national security matters. Consequently, Friedrich Merz of the CDU/CSU is now set to begin coalition talks to form Germany’s next government, with the result strengthening the centre-right’s position.

However, Germany’s complex proportional representation system means that coalition-building will be crucial, with the coming weeks determining the exact composition of Germany’s new government and its economic strategy. The AfD’s rise introduces further volatility to the coalition-building process as with nearly one-fifth of the vote, it now stands as the primary opposition force, reshaping Germany’s domestic political discourse. Co-leader Alice Weidel has stated that the party is open to coalition discussions with the CDU/CSU, stressing shared stances on migration policy, and while CDU/CSU leaders have previously ruled out working with the AfD, the party’s electoral gains have amplified pressure within conservative circles to reconsider their stance. If the CDU/CSU engages in coalition discussions with the AfD, it would represent a fundamental realignment in German politics, despite any coalition involving the AfD likely facing strong resistance from within CDU/CSU ranks and among Germany’s broader political establishment. Consequently, if CDU/CSU ultimately refuses to negotiate with the AfD, coalition-building will become even more complex, likely requiring a multi-party agreement that could delay policymaking and prolong uncertainty in Europe’s largest economy.

Whether Germany emerges from this election with a stable leadership or faces prolonged uncertainty will be a key question for investors and policymakers alike. Economic policy remains a major concern as Germany contends with slowing growth, industrial stagnation, and high inflationary pressures, so the next government’s fiscal stance will be pivotal, particularly relating to EU financial commitments. A centre-right-led coalition is expected to prioritise fiscal consolidation, while a broader alliance incorporating the Greens or SPD could maintain a more expansionary stance, with markets watching coalition negotiations closely over the coming weeks.