Different reactions were shown by European financial markets following the German federal election and later the reports of big boosts in defense spending. The DAX, which is a market barometer of Germany, increased by 0.6%, thus abandoning the bear run of three sessions and beating other European indices. The rise in stock prices resulted from the fact that the investors had already taken all the news in the election and set the stage for a new coalition government.
The election has brought Friedrich Merz’s conservative bloc, which is the biggest party, to the fore but has failed to achieve the 30% vote share they would have needed for an outright mandate to govern. This has paved the way for the most complicated coalition negotiations, with the most likely outcome being a partnership between Merz’s conservatives and Olaf Scholz’s weakened Social Democratic Party (SPD). The idea of a grand coalition has so far been a bit embraced by markets, as it means the political reality in Europe’s number one economy will be somewhat stable and that there will be some continuity among policies.
In supplement to the market dynamics is the news of a proposed €200 billion raise in the German defense budget. This whopping increment of military expenditure is a new orientation of the German policy and, therefore, raises both the domestic industrial questions and the wider coverage of the European defense sector. The defense stock shares across Europe registered price increases, as the investors were optimistic about the amounts of the contracts of the governments and the emergence of a weapon race between the European countries who are interested in strengthening their military power.
The euro initially rose above other major currencies after the election release, as well as the news about defense spending. Nevertheless, on its way to the level 1.050 against the US dollar, it encountered resistance with the mention of the US tariffs and a doveish European Central Bank being the deciding factor. Currency experts are closely studying how the coming political and fiscal developments in Germany can influence the ECB’s monetary policy moves in the following months.
Although German markets have been more resilient, other European indices have been less successful. The worry concerning the trade tensions between the countries which are omnipresent but especially the USA with its Canada and Mexico import tariffs have been the issues that have been weighing the investments across the continent. European economies are closely related in terms of their interdependence, so if there are any challenges in global trade flow, definitely, governments should anticipate the significant results of them.
As the political and economic Europe landscape is still going through continual changes, market participants are waiting anxiously for further information on the policy decisions of Germany under the new coalition government. The main areas of concentration are programs for energy transition, digital infrastructure investment, and fiscal policies that are designed to boost economic growth in the post-pandemic period. The upcoming weeks will probably be marked by greater market volatility as these positions become clearer, and their potential impacts on various sectors will be assessed.
