German stock and bond markets were volatile on Tuesday after Friedrich Merz suffered an unexpected setback in his bid to become Germany’s next chancellor—but later stabilized after he secured a parliamentary majority in a second vote.
Merz, leader of Germany’s Christian Democratic Union (CDU), was elected chancellor on Tuesday afternoon after winning 325 votes in the Bundestag—above the 316 required for an absolute majority. The result followed a dramatic morning in Berlin, where Merz initially failed to secure the necessary parliamentary majority to become chancellor in the first round of voting. Despite a coalition agreement between the CDU/CSU and the Social Democrats (SPD) holding 328 of the 630 Bundestag seats, Merz garnered only 310 votes in the first round, falling six short of the required 316.
It was the first time in the history of the Federal Republic that a chancellor-designate failed to secure a majority in the first round, marking a politically charged start to Merz’s leadership.
“The unprecedented failure of Merz to be elected as German chancellor in the first round suggests that he cannot rely on full support from the two parties backing his coalition, his own centre-right CDU/CSU and the center,” says Holger Schmieding, chief economist at Berenberg Bank.
German stocks Initially Down, Later Rebound
The DAX index dropped by around 1% following the news, while the broader STOXX Europe 600 index declined by 0.5%. Markets recovered some ground after Merz’s successful second-round vote. The DAX trimmed losses and closed 0.5% down.
The political impasse has particularly affected sectors reliant on government contracts and infrastructure spending. Defense-related stocks, which had anticipated increased spending under Merz’s proposed EUR 1 trillion investment plan, experienced notable declines.
Rheinmetall RHM, Hensoldt HAG and RENK R3NK all traded down as much as 4% before bouncing back later in the session. By market close, Rheinmetall was up 0.68%, while RENK gained 1.71%.
German bond yields were also initially lower as the uncertainty surrounding Germany’s political leadership has raised concerns about the future direction of economic and fiscal policies. The yield on the 10-year Bund decreased by approximately two basis points, but later recovered to trade broadly flat on the day.
The euro held steady against the US-dollar despite the news at around $1.13.
What’s Next for Merz and for Markets?
Despite the early hiccup, Berenberg’s Schmieding expects Merz to move ahead with his proposed policy agenda, including the vast public investment plan. Standard parliamentary votes—unlike Tuesday’s chancellor vote—require only a simple majority and are not held by secret ballot, making it easier to govern once a chancellor is in place.
Still, the first-round failure has raised questions about the unity of Merz’s coalition and the discipline of his parliamentary base, Schmieding said in a research note. “A few SPD members of parliament may dislike the planned reform of basic welfare (’Bürgergeld’) and tighter immigration controls. Some conservatives may also still object to the loosening of the debt brake,” Schmieding said. This may create friction going forward.
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