Germany, the EU’s largest economy and long seen as its engine, has faced stagnation in recent years due to structural weaknesses, global economic shifts, and policy missteps—exacerbated by weak leadership. This discontent paved the way for Friedrich Merz, leader of the Christian Democratic Union (CDU), to win 28.5% of the vote, positioning him to form a coalition government. In this blog, we examine the factors behind Germany’s slowdown and what the new leadership could mean for equities and the broader economy.

First, let’s look at some numbers:

Real GDP growth rate for select countries (2010 – 2024*, % change over the year before)

Source: European Commission, IMF, BEA, Statista
*2024 numbers for all countries except the US and the UK based on the latest estimates

For over a decade, Germany’s economic growth has steadily declined, and it has been struggling in the aftermath of the Global Financial Crisis and Euro Debt Crisis. The COVID-19 pandemic worsened the situation, and the Ukraine war sent energy prices soaring, dealing a final blow.

Germany’s problems have been mounting: weak industrial competitiveness due to high labor costs, overregulation, slow digitalization, and weak export demand; structural challenges such as an aging population, worker shortages, and a lack of big tech giants to drive innovation. Weak leadership and policy missteps, including high taxes and excessive bureaucracy, further stifled growth.

To make the situation even worse, Germany closed many of its nuclear plants, a decision which has proven to be catastrophic for the country’s energy mix, as well as energy prices. Of course, this wasn’t made in a vacuum, as investments in renewables, but also natural gas plants were significant. However, once the war in Ukraine started and Germany was effectively cut off from cheap Russian gas, all of the economic issues became starkly apparent.

With the broader EU economy also stagnating under inflation and high interest rates, it became clear that Germany needed a new direction. This was reflected in the record-high voter turnout of 83% in 2025, the highest since reunification.

German 2025 election results (% of the total seats)

Source: Federal Returning Office, InterCapital Research

With the CDU’s victory, Friedrich Merz is set to become Chancellor but will need to form a coalition to secure a governing majority. If successful, his administration is expected to prioritize economic liberalization and stricter immigration policies. On the economic front, CDU plans tax cuts for individuals and businesses to stimulate growth while upholding the debt brake to limit government borrowing. Proposed welfare reforms aim to tighten social benefits to encourage employment, alongside privatization and deregulation to reduce bureaucracy and boost business competitiveness.

On immigration, CDU will tighten asylum policies, restrict entry for undocumented migrants, and enforce permanent border controls. Additionally, those without valid asylum claims already in Germany face immediate deportation under the new policies.

CDU’s foreign and defense policy focuses on boosting military spending to meet (or exceed) NATO’s 2% target while advocating for stronger EU defense cooperation to reduce reliance on the U.S.—though the U.S. remains Germany’s key ally. They also support a tougher stance on Russia and China, pushing for more sanctions on Russia and economic decoupling from China in critical sectors.

On energy and climate policy, CDU plans to reopen nuclear plants, pursue a balanced green transition by supporting renewables while slowing the phase-out of fossil fuels, and introduce energy tax cuts for businesses and consumers. In social and cultural policy, they aim to increase STEM and vocational education investments, support working families, and promote a merit-based system to reduce welfare dependency.

On EU & trade policy, CDU advocates for a less bureaucratic EU, pushing for pro-business reforms. They support stronger external borders and aim to diversify trade partners to reduce dependence on China. In digital and tech policy, CDU plans to invest in digital infrastructure, AI, and automation, enforce stricter data security regulations, and offer tax breaks for tech startups to spur innovation.

While it’s unclear how much of this agenda will be fully implemented—given the common gap between campaign promises and what is actually delivered and implemented —these policies provide a clear direction for Germany’s economic and geopolitical stance moving forward.

Several German sectors are poised to benefit from CDU’s policy shift:

• Energy & utilities: E.ON, RWE, Uniper, and Siemens Energy stand to gain from lower energy taxes, the revival of nuclear power, and a slower fossil fuel phase-out, with fossil fuel investments back on the table.

• Defense & aerospace: Increased defense spending, EU defense cooperation, and rising geopolitical tensions could boost firms like Rheinmetall, Airbus, and Hensoldt through higher military procurement.

• Industrials & manufacturing: Lower corporate taxes, reduced bureaucracy, and a less aggressive green transition would ease costs and expand exports for Siemens, BASF, Volkswagen, BMW, and Daimler Truck.

• Financial sector: Pro-business tax cuts, deregulation, and a lending-friendly environment could increase corporate profits and benefit Deutsche Bank, Commerzbank, and Allianz, particularly if economic growth rebounds.

• Tech & digitalization: Investments in AI, cybersecurity, and digital infrastructure, along with tax incentives for startups, could support firms like SAP, Infineon, and Deutsche Telekom.

While logistics, transport, construction, and real estate are also expected to benefit, some sectors may face headwinds under CDU’s policies:

• Renewable energy: A slower green transition could delay investments and reduce government support, impacting firms in wind and solar energy.

• Hospitality & agriculture: Stricter immigration laws may worsen workforce shortages, making labor-intensive industries more vulnerable.

• Welfare-dependent sectors: Retailers and discount chains, such as Aldi and Lidl, could see lower demand as welfare cuts reduce spending power among low-income consumers.

Ultimately, it remains uncertain which reforms will be implemented and to what extent. With a fragmented parliament and a mandatory coalition government, compromises will be inevitable, and some policies may be watered down or scrapped entirely. One thing is certain, however, if changes aren’t made, Germany could once again be dubbed the “Sick Man of Europe” – but this time, the symptoms are far more pronounced, meaning that the cure will also have to be much stronger and all-encompassing.