Merz needs an alliance with the SPD to form Germany’s new government
Friedrich Merz appears poised to become Germany’s next chancellor, yet he faces one critical hurdle: securing the support of the Social Democrats (SPD) to command a majority in parliament. Despite the SPD’s worst election result since World War II, the party’s cooperation is essential and gives it considerable leverage in the coalition talks.
Merz, who leads the conservative Democrat-led bloc, has ruled out governing with the far-right Alternative for Germany (AfD), leaving the SPD as the only viable partner. He has pledged to conclude negotiations quickly, aiming to establish a new government within two months. However, the SPD’s leadership is taking a firm stance, stating that their participation in any coalition has not been decided and that the party will carefully weigh its options.
The return of a so-called “grand coalition”, which functioned under Angela Merkel in three of her four terms, might look familiar, but political divisions have deepened since Merz took the reins of the Christian Democrats in 2022 and shifted the party further to the right. Tensions flared recently when Merz, with AfD support, attempted to impose stricter migration measures despite SPD opposition.
Meanwhile, the Social Democrats are regrouping after their vote share plummeted by a third to 16.4%. With Chancellor Olaf Scholz stepping down following his unsuccessful re-election bid, new figures are coming to the fore. Defense Minister Boris Pistorius and party Co-leader Lars Klingbeil are expected to guide the SPD’s negotiation strategy, emphasizing that Merz must demonstrate how a coalition can effectively address the nation’s challenges before the party commits to joining his government.
Germany faces multiple pressures: two years of economic contraction, ongoing repercussions from the war in Ukraine, and the threat of a global trade conflict if the United States moves forward with protectionist measures. Merz has warned that unless the incoming government revives the economy and tackles migration issues, the AfD could gain further ground and jeopardize Germany’s role in the European Union.
Elsewhere on the political stage, the Greens are bracing for a leadership shake-up. Although they fared relatively better than their former coalition partners, their share still slipped from the previous election. Economy Minister Robert Habeck has announced that he will not seek a continued leadership position after winning 11.6% of the vote, while Foreign Minister Annalena Baerbock plans to run for a leading role in the party’s parliamentary group. Both will remain in the caretaker government until a new cabinet is sworn in.
In this atmosphere of uncertainty, Merz and the SPD must work through their differences, particularly on matters such as government borrowing and welfare, if Germany is to avoid political gridlock and chart a path forward.
EURUSD steady
The Euro started the week on a positive note following the German elections, reaching a high of 1.0530. However, it has since eased back towards Friday’s closing level around 1.0460. Despite this pullback, the bullish outlook remains intact. Technical indicators are showing a bullish trend across most timeframes, and the Time/Price method suggests potential further gains ahead, possibly targeting 1.06 in the near term.
Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.
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