Friedrich Merz's election victory marks the start of a new political era for Germany, but his path to governing is anything but clear. His party secured the most votes in Sunday's election, but without an outright majority, he must navigate complex coalition talks, Reuters reported.

With economic troubles mounting and geopolitical tensions rising, Germany's prolonged political uncertainty could have far-reaching consequences.

A Fractured Political Landscape

Merz's conservative alliance received around 29% of the vote, a strong showing but not enough to govern alone. With the outgoing Chancellor Olaf Scholz's Social Democrats (SPD) capturing a significant share of the vote, Merz will likely need to bring them into his coalition.

However, the real challenge lies in whether a third party will be required to secure a parliamentary majority. The Greens, with 12%, and the pro-business Free Democratic Party (FDP), hovering near the 5% threshold, are potential coalition partners.

Friedrich Merz is on track to become German chancellor after his conservative CDU polled the most votes in Sunday's election, while the AfD made the biggest gains for the far-right in 80 years pic.twitter.com/xh5bVbmdUF

— TRT World (@trtworld) February 24, 2025

Merz has campaigned on tax cuts, particularly reducing business levies from 30% to 25% while easing the burden on households. However, the SPD and the Greens favor tax hikes on higher incomes, making compromise inevitable.

If the FDP joins the coalition, they are expected to push for lower taxes and resist any reforms to Germany's strict "debt brake," which limits government borrowing. These conflicting fiscal visions could prolong negotiations, delaying much-needed economic stimulus as Germany faces its third year of economic stagnation.

Germany's election also highlighted growing voter discontent with mainstream parties. The far-right Alternative for Germany (AfD) secured about 20% of the vote, while the far-left Die Linke took 9%, reflecting political fragmentation.

Economic and Fiscal Policy at a Crossroads

Despite the uncertainty, Germany's stock market reacted positively, with the DAX index rising 0.6% on Monday. However, the market remains cautious, particularly given Germany's reliance on global trade. The specter of a potential trade war, especially under a possible second Trump presidency in the U.S., continues to weigh on valuations.

Merz's post-election remarks signaled a shift in Germany's foreign policy stance. Traditionally a strong US ally, Merz questioned Washington's commitment to European security, particularly in light of Trump's recent comments on NATO.