Friedrich Merz was elected as Chancellor of Germany in the second-round parliamentary vote after a major setback during the first vote.
This marks a significant moment for Germany as Merz secured the needed support to lead a coalition government formed by the center-right Christian Democratic Union (CDU), its affiliate the Christian Social Union (CSU) and the center-left Social Democratic Party (SPD).
The elections came at a time when Germany faces economic pressures from stagnation, internal conflicts and geopolitical issues.
Recovery From Election Setback
Friedrich Merz’s first election result for Chancellor fell short of the required 316 votes in the 630-member of the Bundestag, where Merz only secured 310, which resulted as a major blow in the first round.
The failure made spectators wonder whether a second vote would happen and whether Merz could gather enough support. ⁽¹⁾
In the second round, Merz gained 325 votes, enough to be elected as German Chancellor by the German President Frank Walter Steinmeier.
Formation of the Coalition and Policy Objectives
The CDU-CSU alliance formed by Friedrich Merz won the largest share of votes in Germany’s federal election back in February, which helped him to be a frontrunner to become Chancellor.
The CDU-CSU coalition signed an agreement this week after weeks of negotiations, prioritizing key policies on migration, tax reforms, social security and fiscal package. The package includes changes to Germany’s debt rules and a €500 billion investment in defence, infrastructure and climate initiatives. ⁽²⁾
The coalition has already announced key cabinet appointments, including Lars Klingbeil as Vice Chancellor and Finance Minister, Katherina Reiche as Economy Minister, and Johann Wadephul as Foreign Minister.
These selections have a ton of experience and political alignment, though maintaining unity within the coalition will be a challenge given the ideological differences between the center-right and center-left partners. ⁽³⁾
Economic and Political Challenges
Germany’s economy has been stagnating. The country also entered a small recession in 2023. GDP has fluctuated between growth and contraction each quarter since 2024.
Friedrich Merz has dedicated his focus to economic growth, where the coalition’s fiscal package, including a €500 billion investment fund, is seen as a “done deal”. Other proposed measures, such as corporate tax cuts and faster investment write-offs, face uncertainty due to potential budget disputes. ⁽⁴⁾
GDP is expected to continue stagnating after shrinking in the previous two years, stated by Germany’s Economy Minister Robert Habeck. Government economists previously expected expansion of 0.3% this year, having already revised that down in January from an initial forecast of 1.1% growth published in October. ⁽⁵⁾
Habeck blamed the persistent weakness in Europe’s biggest economy on uncertainty unleashed by US President Donald Trump’s trade war, as well as tepid demand for German exports and diminishing competitiveness.
Internal coalition changes also pose a risk. The first-round voting failure highlighted disappointment within parts of the CDU-CSU and SPD factions, raising concerns about trust and stability. Otto Fricke, a former Bundestag member, stated the importance of trust within the cabinet and parliament to enact swift legislative changes. Coalition tensions could hurt economic growth, which was supposed to be supported by the fiscal package. ⁽⁶⁾
Geopolitical Challenges
Merz faces geopolitical concerns, including trade disputes with the US, the Russia-Ukraine war. Debates over defense spending add further uncertainty. The coalition agreement reflects a commitment to addressing these issues, but finding consensus will require careful navigation.
US President Donald Trump this year announced sweeping tariffs that threaten a third year of downturn for Germany, which has already had to grapple with the end of cheap Russian gas since Moscow’s invasion of Ukraine in 2022 and growing rivalry from China.
Friedrich Merz made his first trip as Chancellor on Wednesday, to top allies France and Poland, must boost their defense spending to fill gaps in the bloc’s capabilities and secure continued support for Ukraine. ⁽⁷⁾
On Thursday, he will speak by phone with Trump – and could even meet him before the NATO meeting at the end of June. ⁽⁸⁾
Market Reactions
German stocks recovered from early losses on Tuesday after conservative leader Friedrich Merz was elected Chancellor during a second vote in parliament.
Germany’s DAX index ended 0.5% lower, after falling as much as 2% earlier when Merz’s new alliance with the center-left Social Democrats was dealt a surprise defeat in the first attempt.
The Euro extended gains after Merz secured the votes needed to become German Chancellor following an unexpected setback on the first attempt. EUR/USD rose 0.5%.
