Germany votes: What it means for Europe’s economic future

Germany’s general election is fast approaching on February 23. As Europe's largest economy, accounting for roughly a quarter of the EU's GDP, Germany's political landscape holds significant sway over economic growth, trade, and investment opportunities across the continent.

Here, we delve into the potential outcomes of Germany's fourth snap election in its post-war history and what it could mean for global investors navigating a rapidly evolving political and economic environment.

State of play: Germany at a crossroads

Germany's election follows 2024’s tumultuous “year of elections,” which saw nearly half of the world’s population called to vote. The status quo was challenged as frustrations mounted over issues like inflation and immigration. That made it a hard year for incumbents and traditional parties, creating opportunities for right-wing candidates.

That context is notable, as the path to Germany's election wasn’t ordinary. Originally slated for September, the election was brought forward due to the collapse of the governing coalition late last year. Disagreements over managing Germany's economic stagnation were rife: its economy has not grown since the pandemic. That makes its performance the worst among the euro area's major economies.

While all parties are focused on near-term economic stabilization and medium-term economic reform, their tactics, proposed scale, and prioritization differ. We identify five key policy priorities evident on the campaign trail:

The policy arena: 5 priorities for Germany’s future

1. The debt brake:

Germany's fiscal rules, particularly its "debt brake," are contentious. Enshrined in the constitution after the 2008 financial crisis, it limits the central government's budget deficit to 0.35% of GDP. That’s considerably more limiting than the broader EU rule at 3% of GDP, and a far cry from the 6-7% deficit that the United States has been running.

Critics argue this restricts borrowing capacity, despite Germany's ‘room’ to spend more given its relatively low debt-to-GDP ratio of 60%.

This seems especially challenging considering rising healthcare and pension costs over the next legislative period, along with widespread calls for increased defense spending. Those liabilities eat into much of the available budget before even considering potential new growth initiatives of the new government. For that reason, some degree of reform to the debt brake seems likely in our view, unless the AfD is able to form a blocking minority.

2. Deindustrialization:

Once a global growth powerhouse, Germany's industrial sector is now sputtering.

The sector was dealt a blow from China's post-COVID growth slowdown, reducing demand from Germany as a key export partner. Soon thereafter, an energy crisis unfolded amid the war in Ukraine. All that made it even harder for Germany to embark on transitioning its cornerstone auto industry from internal combustion engine (ICE) vehicles to electric vehicles (EVs). In turn, it’s lost ground to U.S. and Chinese rivals.

The next government is now tasked with regaining that competitive edge, considering options like investing in renewable energy infrastructure, reducing network charges, and lowering electricity taxes. Those challenges will also need to be tackled in the crosshairs of unfolding trade tensions, with potential U.S. tariff threats looming.

3. The new economy:

This priority isn’t unique to Germany. The euro area has been in the process of transitioning its “old economy,” marked by export-heavy, low-growth industries, towards higher-growth industries like technology.

While all parties are aligned on the goal of fostering growth through the likes of digitalization, AI, and startups, their tactics differ. The CDU/CSU favors deregulation to stimulate innovation, while the SPD and Greens support government subsidies for specific sectors. But, with fiscal rules again in mind, it’s a question of how much can be implemented.

4. Tax reform:

Along the campaign trail, reforming Germany's tax code has been intertwined with growth plans.

The CDU/CSU aims to lower personal and corporate taxes, potentially aligning the corporate tax rate with the UK and US at 25%. The SPD and Greens focus on tax relief for low and middle-income households.

Such policies could alleviate pressure on businesses and households, but would also create a sizeable financing gap and face scrutiny for the potential fiscal impact.

5. Immigration & the labor force:

Migration has been a key issue, with general agreement on incentivizing skilled worker immigration amid an aging population. However, the level of openness to broad immigration has been hotly debated.

The landing point will matter – but its impact likely won’t be felt for a few years, as labor force and demographic dynamics adjust.

A heavy carriage in Europe’s growth train

Riding the train of Europe's economic growth has felt frustratingly sluggish, with momentum barely gathering steam. On one hand, this steady pace has allowed many European countries, including Germany, to avoid the overbuilding and debt excesses seen elsewhere. However, it has also led to the neglect of structural issues that demand significant investment.

Germany has acted as a heavy carriage, burdened by challenges in the automotive sector, energy dependence, and a tough environment for innovation. However, it isn’t the only culprit that has been a drag on the region. France is grappling with its own political challenges and fiscal pressures, and Italy is facing slow growth and an aging population. Woes for the region have only been intensified by the potential threat of U.S. tariffs. The EU, especially manufacturing-intensive economies like Germany, would be significantly affected if implemented.

It isn’t all bad though. Spain and Portugal have recently injected some vitality through a revival in tourism and services, and some relief may come from the European Central Bank's easing path. Developments in potential Ukraine-Russia ceasefire discussions could further boost the economy if they lead to lower energy costs, and looser fiscal policy, including addressing Germany's debt brake debates, could also mark a significant transition for Europe's economy.

Such efforts, if realized, will take time to have a material impact. Growth, both in Germany and across the region, is expected to remain limited in 2025.

What does it mean for investors? Finding focus

Despite all the uncertainty, it may seem surprising that European stocks are at record highs. The Stoxx Europe 600 has outperformed the S&P 500 in the first six weeks of 2025, and Germany's DAX Index has slightly outpaced U.S. stocks over the last four years.

That offers an important lesson: The market is not the economy. Recent strength has been driven by better-than-expected earnings and a long-awaited recovery in valuations.

To us, the recent rally may present an opportunity to check-in on portfolios and any home country biases. A 2021 study found that German investors allocated 58% of their assets to domestic stocks, even though Germany makes up only 2% of the MSCI All-Country World Index.¹ We see similar trends across Europe, and such a bias can potentially limit returns and increase exposure to domestic risks.

Within European markets, we are focused on sectors poised for growth. An uncertain geopolitical backdrop, combined with efforts to stabilize and rebuild growth, highlight the importance of themes like global security, the AI value chain, and consumer strength. To that end, Europe hosts a number of leading technology firms, particularly in semiconductors and software. The industrials sector is revving up, driven by its essential role in supplying critical inputs along both the AI and the aerospace and defense supply chains. And more recently, the luxury sector has been rebounding alongside stronger U.S. consumer demand.

Finally, as the ECB cuts interest rates, we see opportunities in extending duration in European fixed income. A weaker euro may also make an attractive borrowing currency.

Above all, often the best course of action through elections, geopolitical flashpoints, economic change, or any source of uncertainty, is to ensure your portfolio is aligned with your long-term goals.

Your JPMorgan team is here to help navigate these developments and explore potential opportunities.