The CDU-CSU won the German federal elections, gaining 29% of the vote and 208 seats, with leader Friedrich Merz set to become the next chancellor.

The results are broadly in line with polling before the election, but still represent a significant surge for the AfD, with 21% of votes and 152 seats. The SPD and Greens lost votes, while neither the FDP nor BSW crossed the 5% threshold to enter the Bundestag. 

A grand coalition of the CDU-CSU and the SPD is likely to form the next government. But leadership changes in the SPD may slow down talks.

While a two-party coalition should be more stable than the outgoing traffic light coalition, this government inherits deep economic and geopolitical headwinds.

The economy has stagnated amid years of low investment and high energy prices, while demands on European defence spending are increasing. 

The coalition will likely agree on tax cuts, reforms to migration policy, increased energy security, and deregulation. But changes to fiscal policy and defence spending will prove more challenging. 

Indeed, there is no straightforward two-thirds majority between the CDU, SPD, and Greens for constitutional reform of the debt brake. While Die Linke has supported debt brake reform in the past, it may oppose the creation of extra fiscal space for defence spending. 

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