The coalition and its mandate
Germany is governed by a CDU/CSU-SPD grand coalition under Chancellor Friedrich Merz, who took office in February 2025 after the CDU/CSU won 28.5 percent of the vote. The coalition commands a parliamentary majority and has used it decisively, pushing through the constitutional debt-brake reform and the €500 billion fund within weeks of forming. By the standard of recent German governments it has been unusually activist. But it governs from a narrower base than the grand coalitions of the Merkel era, and it does so against a political backdrop that is shifting beneath it.
The AfD ascendancy
The single most important fact in German political economy is the rise of the Alternative for Germany. The AfD took 20.8 percent in February 2025, its best-ever federal result, and through 2026 it has led several national polls, overtaking the CDU/CSU. This is a structural shift, not a protest spike: the AfD has consolidated a fifth to a quarter of the electorate around opposition to immigration, scepticism of the EU and NATO commitments, and resistance to the costs of the green and defence transitions. The mainstream parties maintain a firewall against governing with it, but a firewall around a quarter of the electorate is a source of permanent instability, narrowing the viable coalition arithmetic and radicalising the policy debate.
Markets price German politics as stable because the institutions are strong and the firewall holds. That is correct for now. But a governing party polling second to an excluded insurgent is not a stable equilibrium, and the longer the economic recovery disappoints, the more the AfD's critique of the cost of the transitions resonates.
The consent problem
The fiscal programme has a democratic vulnerability that is underappreciated abroad. The decision to spend on the order of €650 billion on defence over five years, lifting the defence budget to a record €108.2 billion in 2026 and aiming at the NATO 3.5 percent-of-GDP target, was taken rapidly and largely without a popular mandate - the debt-brake reform was even passed by the outgoing parliament before the new one convened. Analysts have argued that German leaders miscalculated the public's appetite for war spending. Polls show real ambivalence: voters accept the security argument in the abstract but resist the trade-offs against domestic priorities. That gap between elite consensus and popular consent is precisely the space the AfD occupies.
| Dimension | Reading | Risk |
|---|---|---|
| Coalition stability | Solid majority | Low near-term |
| AfD support | First in polls | Structural / rising |
| Merz approval | ~45% | Mediocre |
| Defence consent | Ambivalent | Underpriced |
| Next federal election | 2029 (scheduled) | Distant but defining |
What it means for the economic programme
The investment conclusion is that the binding risk to the German economic story is political, not fiscal or financial. The sovereign is AAA, the central bank is credible, the institutions are strong. What is fragile is the consent for the programme and the durability of the coalition that enacted it. If the recovery disappoints - the substitution scenario where the money is spent without lifting growth - the political cost lands on a government already polling behind an insurgent, and the 2029 election becomes a referendum on the entire post-2025 settlement, including the defence build-out and the EU and NATO commitments that underpin it.
For allocators this argues for distinguishing sharply between German credit, which is safe, and the German political trajectory, which is a genuine medium-term risk to the euro project itself. The near term is stable; the multi-year tail is the one that matters, and it is widening rather than narrowing.