Conservatives Lead in German Elections, but Coalition-Forming Will Be Difficult

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--As generally expected, a combination of two years of a shrinking economy, higher energy prices and immigration issues pushed Germany's conservatives to the top of Sunday's snap elections. However, with only 208 seats in the 630-seat Bundestag, the center-right Christian Democratic Union/Christian Social Union (CDU/CSU) leader Friederich Merz will need to get others on board to form a new government.

Current Chancellor Olaf Scholz's Social Democratic Party (SDP) appears to have been voted out, finishing third to the far-right Alternative for Germany (AfD). The AfD, endorsed directly by Elon Musk and indirectly by President Donald Trump, has doubled its vote since the 2021 elections, amounting to 152 seats in the Bundestag, and the SDP holding 120 seats.

Normally the second-place finisher would be in serious contention for inclusion in a new coalition, but the AfD's extremist views have led the CDU/CSU and all other parties to declare their unwillingness to be part of any government that would include them.

Merz has reportedly stated an interest in working with the newly-defeated Social Democrats to reach the number of seats needed to form a government. He has also promised to try to get a government formed by Easter, giving him just under two months to get that done. A coalition between parties with such different views on the top issues could be difficult to form in the first place, and challenging to keep operating once put in place.

Many observers think it could be months before a new government is formed, meaning current chancellor Scholz would be a caretaker, during which time little legislation of any sort could be considered. That stagnation would also delay any changes to the energy mix or the economy. Many Europe watchers expect little to no actual change in Germany in 2025.

Still, German law requires the Bundestag to meet within 30 days of an election, at which time it is expected to elect a new speaker and deputies. That position generally goes to the top vote-getting party, which would be the CDU/CSU in this case.

Energy
Both of the top two parties in the election made the SDP's energy policy a key issue, along with the general economic malaise and immigration. The closing of the last of Germany's nuclear power stations in 2023, along with the major growth of wind power, in a program known as "EnergieWende," has been blamed for a significant rise in electricity costs. The loss of Russian natural gas due to the war with Ukraine also hurt energy prices.

During the campaign, both the conservatives and the Social Democrats pledged to reduce energy prices, with few details. As the nation has few fossil fuel resources of its own, there is no "drill baby, drill" to fall back on as there is in the U.S.

At the same time, the CDU/CSU has also pledged to continue the nation's march toward net zero carbon emissions by 2045, a goal touted by the Social Democrats as well. That goal is in jeopardy as the government's infrastructure spending required may be out of reach due to limits on borrowing. While there have been discussions regarding expanding those limits, many are reluctant to make that move.

Other sectors are under stress as well, mainly due to high energy prices, said IIR Energy Market Strategist Geoffrey S. Lakings. "Germany is facing a major crisis in its automotive industry due to China's rapid advancements in electric vehicle (EV) technology, which threatens to significantly reduce the market for German cars in China, their largest export market. This could potentially force Germany to look towards other markets to sell their vehicles, including potentially increasing production within Europe or seeking new export destinations as they transition to electric mobility."

Energy costs have also depressed the chemical industry, as it "has underscored the sector's heavy reliance on energy-intensive processes, revealing vulnerabilities in their traditional business models. However, this challenge presents an opportunity for these companies to reposition themselves as pioneers in sustainability," he said. Forward steps in sustainability may depend on the final makeup of a new government, and its willingness to spend on those goals.

So while German voters have clearly voted for change, the fact that so many opted for the far-right may hamper the government's ability to actually effect that change, at least for the near future.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).