Germany’s new government: what infrastructure investors need to watch

Political dynamics 

With the CDU/CSU securing a victory in the snap elections following the fall of the so-called traffic light coalition led by SPD’s Olaf Scholz, the composition of Merz’s coalition government will be crucial in determining the trajectory of Germany’s infrastructure, energy, and climate policies for years to come, as well as influencing policy direction at the EU level. 

Negotiations between the CDU/CSU and the SPD and expected to conclude in late April to early May, with both parties seeking a stable coalition that can last a full term. This is due in part to the risk both parties see from the Alternative for Deutschland (AfD) which is likely to be the biggest benefactor from any breakdown, as shown by the proportion of second preference votes in the recent election:

Credit: Jerome Dumortier, Indiana University

Added to this is the need for the new government to confront head on the challenges Germany faces related to low growth and industrial competitiveness, which are likely to be exacerbated by geopolitical and macroeconomic uncertainty if left unchecked. 

A business-friendly government? 

Merz’s extensive experience in the private sector signals a pro-business and pro-private investment approach. Given the challenges facing Germany’s economic performance in recent years, he is expected to prioritise boosting industrial competitiveness, including through addressing high energy prices – something also being addressed by the EU’s Affordable Energy Action Plan. For infrastructure investors, this could mean a more favourable regulatory environment with fewer restrictions and greater private sector participation in the energy and transport sectors. 

Merz’s support of Germany’s climate targets, from the 2040 climate neutrality target to the 2038 phase out of coal-fired power generation underline a continuation of the policy objectives set under the Scholz government. However, the CDU/CSU manifesto and Merz’s own statements indicate a preference for greater technological neutrality and market incentives rather than more rigid measures to meet climate goals. 

This has implications across several sub-sectors, including: 

• Renewable energy: The CDU manifesto commits to expanding all renewable energy sources, but investors should watch for policy specifics, particularly regarding incentives for offshore wind, solar, and grid modernisation. 
• Nuclear: Despite Merz’s describing Germany’s nuclear phase-out as a “grave strategic mistake”, the CDU has acknowledged that recommissioning nuclear for energy generation is unlikely in the near term. He is however expected to work with France on advanced SMRs and research into the technology, signalling a longer lead time for any changes. 
• Hydrogen: Hydrogen is discussed in the CDU/CSU manifesto, where there’s support for building a more robust national hydrogen pipeline to connect the regions, alongside working to strengthen the European framework. There’s less certainty around green hydrogen mandates for use in industrial processes such as in the production of green steel, signalling a bigger emphasis on the use of blue hydrogen – something supported by CDU deputy leader Andreas Jung. 

Financing infrastructure and Germany’s debt brake 

The new government’s headroom for spending is limited, as demonstrated by the constitutional courts ruling against the SPD-led government’s infrastructure spending commitments in 2023, which surpassed the threshold of borrowing under Germany’s fiscal rules (know as the debt brake). 

The CDU/CSU may seek to soften the rules to allow higher borrowing for spending in areas including defence and infrastructure build out. However, this would require wider support in the Bundestag to amend the constitution, something that is unlikely to be straightforward or a short-term solution to Germany’s immediate needs. 

The openness to crowding in private capital will therefore remain and is likely to be accelerated, given the opportunity of scaling investments in critical sectors to boost long-term economic growth and address energy insecurity. 

As we await the outcome of negotiations, we will be seeking to work with the incoming government to address barriers to this investment.