Key Takeaways:
A Christian Democratic Union (CDU) coalition with the Social Democratic Party (SPD) and Greens is likely to emerge from the German elections on 23 February 2025, with Friedrich Merz as the new German chancellor.
The rise of the far-right Alternative for Germany (AfD), expected to secure 17–21% of votes, will likely intensify political polarisation and challenge coalition-building among traditional parties.
A CDU-led government is expected to emphasise tax reductions, infrastructure spending, and amendments to the debt brake for fiscal flexibility. Continued economic struggles are likely, but targeted investments in energy, manufacturing, and defence could stabilise key sectors.
Germany will likely advance pragmatic energy policies, balancing renewable energy expansion with transitional support for traditional sectors. Nuclear, hydrogen and Liquefied Natural Gas (LNG) infrastructure investments will dominate, as the government looks to stabilise energy prices.
The automotive sector is poised for policy support under a CDU coalition, with balanced approaches to traditional and electric vehicles (EVs). Investments in digitalisation, green technologies, and autonomous innovation are expected to help counter rising global competition.
Defence spending increases aiming to strengthen NATO and EU strategic autonomy are highly likely. Relations with the US will focus on mitigating tariff risks, while redirected Chinese exports and reliance on supply chains may widen Germany’s trade deficit with Beijing.
Possible Election Scenarios
On 27 December 2024, the Bundestag was formally dissolved after the collapse of the Social Democratic Party (SPD)-Free Democratic Party (FDP)-Green coalition and an unsuccessful confidence vote on 16 December called by Chancellor Olaf Scholz. New elections have been set for 23 February 2025.
Stakes in the upcoming elections are considered particularly high given the rise of the far-right party Alternative für Deutschland (AfD).
KSG intelligence assessments, grounded in expert human intelligence, open source analysis, and wargaming, produced three scenarios of varying likelihood:
Scenario 1: Christian Democratic Union (CDU) + SPD + Greens and/or FDP coalition; Friedrich Merz as chancellor; AfD main opposition (highly likely).
Scenario 2: CDU + SPD grand coalition; Friedrich Merz as chancellor; AfD main opposition (medium likelihood).
Scenario 3: AfD gains a major policy role in the new government leading or as part of a coalition; Alice Weidel as chancellor (highly unlikely).
Although KSG assesses a very low likelihood of Scenario 3, it was examined given KSG clients’ interest in political and economic outcomes should the AfD gain major policy influence.
Although KSG assesses that the AfD is highly likely not to be a coalition partner with policy influence in 2025, it is highly likely to exert policy pressure as the main opposition and human sources outlined that it will then aim to set itself up for power in 2029.
KSG has therefore included an analysis of the AfD’s influence as the main opposition party; however, the assessment primarily focuses on Scenario 1 and Scenario 2. Both scenarios are expected to yield similar policy outcomes due to the likely dominance of CDU policy positions.
This strategic report outlines the detailed context of the election, party positions, KSG’s forward-looking assessment of the effects of the election's possible outcomes, and the most likely scenario six months after the election.
Political and Economic Context of the Upcoming Election
The German Economy
Germany has entered 2025 with a virtually stagnant economy. Currently, Germany is one of the slowest-growing economies in Europe and was projected to contract by 0.1% in 2024 as of November 2024.
Germany’s constitutionally mandated debt brake has caused underinvestment in infrastructure and public goods by the German government and is estimated to have held back roughly $62.5 billion in climate projects.
German manufacturing has been in decline since mid-2022 (PMI < 50), suggesting an overall decline in German industrial competitiveness and an erosion of traditional industrial advantages. This downturn in competitiveness has been exacerbated by declining German productivity since late 2020.
Political concerns about deeper economic hardships have been amplified by announcements of layoffs from major German manufacturing companies like Volkswagen and Thyssenkrupp, a sharp increase in bankruptcies since late 2021, and a persistent decline in demand for German exports since the end of 2022.
High Energy Prices and Energy Security
In the first half of 2024, German energy prices (EUR/MWh) were the second-highest in Europe. Though energy prices have decreased since peaking in 2022, they remain above pre-COVID levels.
High energy prices have repeatedly been cited as a key reason for Germany's decline in global competitiveness since the country’s decoupling from cheap Russian gas, its movement away from nuclear energy and costs related to the green energy transition.
Political disagreement exists over the current German energy mix and how to balance the pace of green transition with a more traditional energy supply.
Labour Market and Migration
Germany currently has an ageing workforce, with baby boomers retiring in large numbers. Without intervention, Germany is expected to face a labour shortage of roughly 5 million people by 2030.
There is currently a shortage of skilled workers, especially in renewable and supply chain industries, which has also contributed to rising unit labour costs.
National Security
Germany’s role and proximity to the Russo-Ukrainian conflict make it a target for Russian attacks. German critical infrastructure and cyberspace are at risk, with Russian disinformation campaigns also posing a threat given the upcoming February election.
Positions on the conflict and German funding for Ukraine are key areas for debate domestically. KSG assesses that the German position on peace efforts and funding will be the second biggest contributing factor to the war’s outcome in 2025, behind the Trump Administration's actions.
Germany's economy has grown increasingly dependent on Chinese markets and raw materials, particularly for green technologies, raising concerns about trade asymmetry, restricted access to Chinese markets, and competition from China's state-subsidised firms and advanced manufacturing under the Made in China 2025 initiative.
Major Party Policy Positions
CDU (Christian Democratic Union):
Trade and Business: Proposes reducing corporate taxes to 25% (Down from 29.9%) and allowing more flexible application of the debt brake, although structural changes to the debt brake remain unlikely.
Energy Policy: Supports a balanced energy transition, emphasising EU energy cooperation and cost reduction.
Security and Alliances: Advocates a larger German role in NATO, stronger transatlantic ties, and enhanced defence capabilities to reduce reliance on U.S. security. Supports significant monetary and equipment aid to Ukraine.
SPD (Social Democratic Party):
Trade and Investment: Promotes tax cuts and corporate investment incentives to attract businesses, emphasising domestic infrastructure and social spending. Supports reforms to the debt brake for increased public investment.
Energy and Climate: Focuses on climate action and raising the minimum wage to stimulate growth.
Security and Alliances: Emphasises EU–NATO cooperation and support for Ukraine but faces criticism for perceived softness on Russia. Supports limited cash transfers to Ukraine.
Greens:
Trade and Investment: Supports easing debt restrictions to fund green infrastructure and environmental programs, financed through higher taxes on the wealthy.
Energy Policy: Prioritises a rapid transition to renewable energy and sustainability-focused investments.
Security and Alliances: Favours diplomacy and stronger EU–NATO cooperation.
AfD (Alternative for Germany):
Trade and Business: Promotes economic protectionism, low taxes, and reduced EU integration. Calls for a return to the Deutsche Mark and a free trade zone outside the EU. Advocates for the current debt brake.
Energy and Climate: Opposes Germany’s energy transition, is sceptical of climate change, and supports nuclear energy, fossil fuels, and relaunching Nord Stream 2.
Security and Alliances: Advocates for a quick resolution to the Ukraine conflict, normalisation of relations with Russia, and limited involvement with NATO. Opposes cash transfers to Ukraine. Related to defence and economic security. The AfD also opposes immigration, especially from Muslim-majority countries, and supports strict border controls, deportation, and reducing asylum approvals, while maintaining access for highly skilled workers.
Forward Look:
Geopolitical implications
Germany-US Relations
KSG anticipates that in Scenario 1, 2 and 3, the new German government will aim to establish strong diplomatic ties with the Trump administration, focusing on mitigating potential tariff issues and ensuring continued US security cooperation.
KSG expects that Trump will use tariffs as leverage to the US’s advantage for economic and geopolitical concessions.
KSG wargaming has concluded that the Trump administration will likely leverage US security guarantees to NATO to push for a US-German bilateral trade deal, increased German auto investment into US plants and higher levels of German defence spending.
US defence firms will likely benefit from increased German defence spending.
Moreover, KSG expects that the Trump administration will leverage these concerns (including German energy difficulties) to increase demand for more traditional energy sources from the US.
Sino-German relations and dependence
KSG expects that Germany will face increased industrial competition from China in the next four years irrespective of the electoral scenario. As KSG assessed previously, the implementation of US tariffs on Chinese exports will likely redirect surplus Chinese exports to Europe. This may undercut any potential gains made by increased competitiveness of German exporters through eased European Central Bank (ECB) interest rates in 2025.
Chinese export redirection will likely undercut German manufacturers of green technology, especially where subsidised Chinese companies will become increasingly competitive. As such, KSG also expects that Germany’s existing trade deficit with China will widen in 2025, despite the EU’s imposition of tariffs on Chinese EVs.
While some German firms dependent on Chinese components may gain from lower input costs resulting from higher competition, KSG expects that this will increase reliance on Chinese supply chains and undermine German efforts toward diversification of critical mineral sources.
KSG assesses that these events will increase political fragmentation in Germany and the EU, fueling nationalist movements and anti-globalisation sentiment. This in turn will likely lead to increased political pressure for protectionist measures against Chinese goods, increased anti-EU sentiment calling for more independence from the ECB, and pressure to establish bilateral trade agreements with China and the US.
KSG expects that in both Scenario 1 and 2, this situation will substantially increase support for the AfD in 2029 as low economic growth continues.
Regardless of electoral outcomes, KSG expects that China will look to reduce EU solidarity on trade protection as it competes for access to EU state markets. Moreover, KSG assesses that China will leverage the prospect of trade restrictions on German luxury goods, chemicals, cars and advanced machinery to ensure that Germany will not enact protectionist measures against Chinese exports.
French-German Relations
KSG assesses that in Scenario 1 and 2, there will be renewed stability and deepening cooperation in the Franco-German axis until the next French presidential election in April 2027. However, an AfD-influenced government is likely to clash heavily with Emmanuel Macron’s pro-European and pro-Ukraine vision.
The chaotic state of the current French government and the nation’s debt ratio (currently around 110%, which exceeds the EU’s 60% cap) will likely cause France to enact austerity measures, reducing French demand for German vehicles, advanced machinery, and pharmaceuticals.
KSG assesses that in Scenario 1 and 2, Germany will seek to mitigate potential negative effects from French debt within EU structures. This will likely contribute to stability in the French economy through joint initiatives, such as joint efforts on green technology and industrial policy, countering Chinese competitive advantages, joint negotiation with the US, defence spending, and institutional reform.
Overall, KSG assesses that Scenario 1 and 2 will produce a stronger EU front concerning US economic and security policies that negatively impact EU interests.
In the case of major AfD policy influence, KSG expects that rising instability and uncertainty in the French-German axis will contribute to French instability and negatively impact business confidence in the EU generally, driving capital flows to the US.
Domestic economic and sectoral implications
KSG assesses that although Germany’s economic growth will remain subdued in 2025, Scenario 1 and 2 will promote an overall pro-business environment with targeted tax reduction and sustained increases in public expenditure. This spending will likely focus broadly on infrastructure, energy, public goods, and digitalisation.
KSG assesses that a CDU-led government will seek either amendment to the constitutionally mandated debt brake, bringing more flexibility to federal debt regulation and closer in line with EU debt regulations.
KSG expects that in the event of the AfD gaining major policy influence, businesses can also expect heavy tax reductions, with less public expenditure due to the AfD’s support for the debt brake in its current form.
KSG assesses that in the case of Scenario 3, while there will be significant protection for traditional industries, there will be severely increased risk and uncertainty in financial markets that will substantially add to capital outflows from Germany to the US dollar.
Automotive Industry
KSG assesses that in Scenario 1, 2 and 3, the incoming German government will place significant emphasis on supporting the automaking industry given the industry’s current struggles.
In the event of Scenario 1 and 2, KSG expects a balanced approach to state support for both traditional combustion engine cars and EVs. KSG expects that such a government would broadly look to shield German automakers from fines related to EU emission regulations and support tax incentives for EVs.
KSG assesses that the AfD will emphasise heavy deregulation and tax reductions as a means of support. However, strong AfD policy influence (Scenario 3) will likely cause cuts to EV tax incentives to drive demand for combustion engines, thus avoiding the financial and political costs of reforming the auto industry.
KSG expects that German automakers will face higher input costs in 2025 due to the imposition of EU tariffs on Chinese EVs given the auto industry’s dependence on Chinese components. Moreover, German automakers are likely to struggle with supply chain disruptions and potential retaliation from China, further reducing their market share in China.
Monthly Passenger Car Exports By Country
KSG expects that any new German government will emphasise innovation and digitalisation alongside lowering the tax burden.
Though the 2025 outlook for the auto industry is not strong, KSG assesses that the imperative for innovation to drive demand for firms innovating in battery technologies, digitalisation and autonomous technologies will remain strong.
KSG assesses that there remains wide demand for high-growth startups and partnerships between automakers and tech firms, especially those that can enable vehicle-to-grid (V2G) integration.
Moreover, KSG assesses that while the focus is heavily on technology inputs into vehicles themselves, there remains a strong demand for innovation in driving energy-efficient manufacturing. This would include IoT-enabled sensors and automation, AI-driven manufacturing and analytics, collaborative robotics, waste heat recovery systems, direct air capture technologies, and mineralisation processing technologies.
Energy Policy
KSG expects that in Scenario 1 and 2, the CDU-led government will take a more balanced and pragmatic approach to the energy transition in 2025. Policy measures are expected to focus on expanding renewable capacity, modernising grid infrastructure, and promoting technological innovation. Transitional support for traditional energy sectors to ensure supply reliability will also be emphasised.
This approach is likely to create opportunities for sustainable energy investments, while also maintaining stability for industries reliant on conventional energy sources during the transition. KSG assesses that Germany will continue to bolster its clean hydrogen infrastructure in its energy transition, but will be largely import-dependent, relying on North African nations, Spain and other North Sea countries to satisfy its demand.
KSG anticipates that a CDU-led government will promote heat pump adoption but likely end grants for gas boiler replacements. The Buildings Energy Act (GEG), which stipulates that all new buildings must be 65% powered by renewable sources will face significant amendments, tempering heat pump demand.
KSG assesses that in Scenario 3, an AfD-led government will likely prioritise fossil fuels and nuclear energy, potentially repealing renewable mandates and sharply reducing demand for green technology investments in Germany. The GEG will likely be repealed, and oppose future legislation related to climate abatement.
KSG expects that in Scenario 1 and 2, a CDU-led government will shift funding toward private-public partnerships to drive green energy innovation, especially in the electric battery sector. In Scenario 3, an AfD-led government would likely abolish green transition grants in favour of a market-driven approach.
KSG assesses that in Scenario 1 and 2, Germany will increasingly turn to the US and Qatar to supply its natural gas demand through Liquefied Natural Gas (LNG) imports. Germany has the largest natural gas storage capacity in the EU and is building new LNG infrastructure around the port of Hamburg to help bolster LNG capabilities. In Scenario 3, the German government will likely advocate for increased fracking within Germany and cooperate with states like Italy to secure natural gas imports.
Monthly US LNG Exports to Germany
Nuclear Energy Prospects
KSG assesses that in Scenario 1 and 2, a CDU-led coalition will likely evaluate the feasibility of investing in small modular reactors (SMRs). However, returning to traditional fission-based nuclear energy will likely not be considered, and the disassembly of decommissioned nuclear plants will likely continue.
KSG assesses that in Scenario 3, the AfD would likely pursue fission-based energy. However, nuclear power will not provide an immediate solution to German energy costs given the length of time it will take to restart (anywhere from 2-3 years not including regulatory processes).
In Scenario 1 and 2, the CDU is expected to prioritise the current energy mix while investing in nuclear fusion, particularly the "Fusion 2040" project aiming for the world’s first energy-generating fusion reactor.
Currently, the German fusion market is dominated by Proxima Fusion and Gauss Fusion (magnet-based fusion), and Marvel Fusion and Focused Energy (laser-based fusion). While KSG assesses that investments in any of these individual companies come with significant risk, extensive investment opportunities exist in this niche industry.
KSG expects that over the next 5 years, demand will increase for the following commodities and components related to fusion power:
Critical minerals: Tritium (from lithium isotopes), beryllium, vanadium, high-temperature alloys, and tungsten.
Materials engineering: Startups focusing on advanced alloys and superconductors.
Fusion ecosystem: Manufacturers of reactor components, robotics, energy storage, and battery technologies.
Defence
KSG expects that in Scenario 1, 2 and 3, the defence sector in Germany will see significant funding and growth in the next five years as the defence budget is planned to reach $83 billion USD by 2028. Overall, KSG believes that the Russian invasion of Ukraine and the potential for US divestment from NATO has provided the necessary general political will in Germany to sustain such investment.
As KSG assessed in October 2024, EU defence policy has turned to the concept of “European Strategic Autonomy,” which aims to make the EU defence sector more self-sufficient. KSG expects that demand for EU-based defence suppliers will increase substantially in the next five years.
As such, KSG expects significant EU-wide investment into and from leading defence companies such as Rheinmetall AG, Krauss-Maffei Wegmann (KMW), Airbus Defence and Space (German division), Diehl Defence, Hensoldt AG, ThyssenKrupp Marine Systems (TKMS) and MTU Aero Engines.
KSG assesses strong demand for defence technology firms that improve the application of force and provide technology-driven tactical and operational decision-making solutions, positioning them for long-term defence contracts.
KSG believes that the specific areas of defence that are likely to attract the most investment are integrated air defence systems, anti-drone technology, AI-driven electronic warfare systems, underwater drone technologies, AI-enabled UAV systems that can integrate with established platforms air, land, sea and space platforms, and more fuel-efficient propulsion systems.
Decision-making solutions for complex battlespaces will also likely attract significant investment. These would include AI-driven decision support systems and mission planning tools, predictive maintenance systems, logistics optimisation tools, command-and-control (C2) systems for multi-domain operations, and space-based surveillance and intelligence systems.
There is a growing demand for hypersonic threat tracking and interception technologies, alongside space-based systems, which are dominated by US contractors.
KSG also expects increased demand from the defence industry to increase substantially for the following materials:
Metal Type | Commodities |
Base metals | Steel, Aluminium, Copper, Nickel |
Specialty metals | Titanium, Tungsten, Beryllium |
Rare earth elements | Neodymium, Dysprosium, Lanthanum, Yttrium, Europium |
KSG assesses that firms capable of de-risking supply chains to the defence industry of these commodities are set to gain substantial investment and support.
Pharmaceuticals and Chemicals
KSG assesses that in Scenario 1, 2 and 3, Germany’s pharmaceutical and chemical sector will continue to struggle and lose market share to Chinese products until German energy prices decline. Layoffs at major pharmaceutical firms can likely be expected as government support is likely to be more focused on the energy and auto industries.
KSG assesses that in Scenario 3, the German government would likely oppose EU and German environmental regulations, allowing the German pharmaceutical and chemical sector to become more competitive against Chinese exports and lowering drug prices for German consumers.
Financial Markets
KSG anticipates that the ECB will ease interest rates in 2025 to stimulate growth, benefiting fixed-income portfolios through bond capital appreciation. This creates opportunities for investment firms to offer fixed-income products appealing to stability-focused investors.
KSG expects the implementation of rate cuts, which would lower borrowing costs and potentially weaken the Euro, will help bolster German exports.
KSG expects that irrespective of the electoral outcome, globally diversified firms stand to gain from capital flows favouring the dollar amid geopolitical risk in the next four years. This will likely take the form of US treasury bonds, US equities and corporate bonds, and dollar cash holdings. As such, KSG believes that portfolios that are heavy on US fixed-income assets and equities, and long on the US dollar will prove profitable over the course of the next German government.
International Security Implications
KSG assesses that Scenario 1 and 2 will translate into increased military support for Ukraine, particularly by supplying equipment previously refused by the Scholz government. However, KSG expects significant pressure from the Trump administration for the CDU to align with US-led initiatives aimed at ending the war in Ukraine. In the case of AfD policy influence in Scenario 3, KSG expects German support for Ukraine to become highly conditional, but ultimately subordinate to US-led negotiations to end the war.
KSG assesses that the Trump administration’s attempts at ending the Ukraine war will be aimed at a peace favouring US interests over EU interests, thereby likely driving EU solidarity in defence spending and procurement.
KSG expects that in Scenario 1 and 2, the substantial increase in German defence spending will give the EU increased strategic options against Russian expansion and subversion.
With respect to the Middle East, KSG assesses that in Scenario 1 and 2, Germany will not alter its current policy on Israel. KSG assesses that in Scenario 3, Germany would slightly reduce its current support for Israel.
Most Likely Scenario Six-Month Post-Election (August 2025)
Coalition Formation
A CDU-led coalition will have formed with the SPD and Greens, with Friedrich Merz becoming chancellor.
The AfD will have assumed the role of main opposition and will have exerted policy influence specifically in tightening German immigration regulations.
The AfD’s opposition role will have allowed it to shape public discourse, laying the groundwork for greater electoral gains in 2029.
Economic Outlook
Germany’s economic stagnation will have persisted, with structural issues in energy costs, manufacturing competitiveness, and labour shortages dominating the policy agenda.
Investment in infrastructure and digitalisation will have begun to stimulate localised growth, supported by targeted tax reductions.
Negotiations concerning the amendment of the debt brake will have made progress.
The ECB will have cut interest rates, having provided stimulus to exports and benefited fixed-income portfolios.
Energy and Climate Policy
The energy transition will have proceeded under a pragmatic approach, with the CDU maintaining stability for traditional energy sectors while steadily expanding renewable energy capacity.
Hydrogen infrastructure and LNG imports will have grown significantly, reducing volatility in energy prices and ensuring supply reliability. However, energy prices will not have yet reduced.
Industrial Competitiveness
US tariffs and sanctions targeting Chinese components will have disrupted European companies reliant on integrated supply chains.
US tariffs will have already reduced German auto exports to the US. Moreover, German cars, chemicals and luxury goods exports will have significantly reduced to the Chinese market.
The German automotive sector will also have faced ongoing challenges from high input costs and competition from Chinese manufacturers.
Although Germany will have kept its compliance with EU laws forbidding direct subsidies to sectors, legal allowance for green transition subsidies will have been exploited to provide significant support for auto makers’ EV production.
Efforts to innovate in battery technology and autonomous vehicles will have gained momentum, supported by public-private partnerships aimed at revitalising the industry.
Security and Defence
German Defence spending will have increased.
Germany’s focus on modernising its military capabilities, including air defence systems and AI-driven technologies, will have positioned its defence sector for long-term growth. Competition for long-term defence contracts will have increased substantially.
German support for Ukraine will have been sustained, but its extent and long-term continuation will be dependent on the success of US attempts at brokering peace between Ukraine and Russia.
International Relations
Despite compartmentalised areas of contestation - relations with the Trump administration will have stabilised through diplomatic compromises on trade and security. Tension areas will still remain.
Franco-German collaboration on EU-wide initiatives, such as industrial policy and defence spending, will have ensured stability within the EU, although the AfD’s growing influence will ensure elements of unpredictability remain.