The euro has rallied this morning as European investors express relief over the outcome of Germany’s election – although this is mingled with anxiety over a slump on Wall Street at the end of last week.
The euro has climbed to a one-month high, after the centre-right CDU/CSU alliance came top of the German election, with 28.5% of the vote, meaning CDU leader Friedrich Merz will become Germany’s next chancellor – once he has agreed a coalition.
A grand coalition – with the SPD, which fell to third place with 16.4% – seems likely.That would keep the far-right AfFD (20.8%) in opposition.
This has lifted the euro up to $1.0528 against the dollar, the highest since 27th January.
The single currency is also a little stronger against the pound, at almost 83p.
Germany’s main stock market index, the DAX, is on track to jump almost 1% at the start of trading.
The MDAX share index, which contains medium-sized, domestically focused companies, is on track to jump 1.25% when trading begins this morning, Reuters reports.
Analysts are hoping that the path to economic recovery, after several tough years for the German economy, could now be easier.
Kathleen Brooks, the research director at XTB, explains: "This is a pivotal election for Germany, and it comes at a fragile time for the country as it battles economic malaise and domestic friction. A coalition between the two biggest German parties could be the most fruitful from an economic policy standpoint, since it may make it easier for Germany to reboot economic growth after two years of economic contraction.
"The best way to do this is to ease restrictions on government borrowing to help spur the economy back to life. This will be much easier if you have the main parties as part of the coalition."
But, Germany would have to relax its "debt brake rules" before it can radically increase borrowing – and there may not be enough support for such a move in the Bundestag.
Holger Schmieding of Berenberg points out that the AfD (152 seats) and The Left (64 seats) have won more than one third of the 630 seats and can thus veto any changes to the constitution.
Schmieding suggests this gives the “populist fringe” a fiscal veto”: "AfD and The Left have little in common. But both these populist protest parties oppose aid to Ukraine. Most likely, the new government will not negotiate a change to the constitution (or any other issue) with the AfD.
"Getting The Left to agree to a debt brake reform that is primarily needed to raise defence spending including more help for Ukraine could also be very difficult. The Left would like to ditch the debt brake. However, its agenda (soak the rich, spend more on welfare and less on defence) is the very opposite of the Merz agenda. Never say never, but finding room for compromise would be an uphill struggle, to put it mildly."
Our main German election live blog will have full coverage of events today: Germany: Merz calls for European ‘independence’ from US after Conservatives win election – Europe live.
Elsewhere, traders are digesting Friday night’s drop in share values on Wall Street, after the latest survey of purchasing managers showed a slowdown in US company growth.
The S&P 500 sank 1.7% on Friday, for its worst day in two months.
The agenda
• 9am GMT: Bank of England’s 2025 BEAR Conference opened by deputy governor Clare Lombardelli
• 9am GMT: German IFO business confidence survey
• 10am GMT: eurozone inflation (final) for Jan11am GMT: Bundesbank monthly report
• 6pm GMT: Speech by BoE policymaker Swati Dhingra at the Birkbeck Centre for Applied Macroeconomics ‘Bracing for turbulence: UK inflation and prospects for monetary policy’
We'll be tracking all the main events throughout the day … |
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