Just today, Germany's general election! A decisive moment for Europe, the market wants to see Germany open the printing press.

Germany's general election is approaching, whether to relax the "debt brake" has become the biggest focus. On February 23 (local time, tonight Beijing time), Germany will hold a new federal parliamentary election. In 2023-2024, Germany's economy experienced two consecutive years of contraction, and restarting the economy to improve residents' living standards has become an important issue in the election. It is worth mentioning that cutting taxes or significantly increasing spending both require relaxing the "debt brake" (Schuldenbremse), which means the German federal government needs to break the restriction of "keeping annual borrowing within 0.35% of GDP". The ruling coalition led by Chancellor Scholz of Germany was dissolved prematurely because they could not reach a consensus on whether to relax the "debt brake". The market generally expects that if the election results can form a stable coalition government, especially a "grand coalition" composed of the Union parties (Christian Democratic Union/Christian Social Union) and the Social Democratic Party, it may temporarily relax Germany's fiscal austerity policy and promote some tax reduction measures. This policy adjustment is a positive signal for the economic recovery of Germany and even the entire Europe. However, some analysts pointed out that the market is currently too optimistic about the German economy after relaxing the "debt brake". For example, The Pacific Investment Management Company pointed out that the rise in German bond yields due to expectations of more borrowing to stimulate growth is "excessive". Similarly, from the perspective of the German stock market, investors are not very optimistic about the overall attitude towards the election. In the German stock market, the MDAX index and Barclays' "German Renaissance Basket," which rely more on the domestic market, have lagged behind, indicating that investors lack confidence in whether the new government can successfully promote growth-oriented policies. Top prime minister candidate Merz: Insists on the "debt brake," but reform possibilities still exist According to CCTV news, under the parliamentary democracy system in Germany, the Chancellor is responsible for the single-party majority seats, the government usually consists of two or more parties. Germany's last federal parliamentary election was on September 26, 2021, and according to the rules, a new round of elections should have been held this September. However, internal conflicts within the ruling coalition led by Chancellor Scholz (composed of the Social Democratic Party, the Green Party, and the Free Democratic Party) have led to serious disagreements on key issues such as the debt ceiling, economic policy, and ultimately its premature dissolution. The main participants in this election include the Free Democratic Party, the Union parties (composed of the Christian Democratic Union and its sister party, the Christian Social Union), and the Alternative for Germany, who support reducing welfare spending and maintaining existing fiscal rules; and the Social Democratic Party and the Green Party, who hope to relax the debt brake and increase public investment. Currently, the Union parties' prime minister candidate Merz is considered the most likely candidate to become the Chancellor. Merz, known as the "German Trump," is a staunch conservative. Merz has promised to adhere to the "debt brake," but there is still a possibility of reform, as he is increasingly aware of the economic growth challenges Germany faces. Merz stated that he would not borrow more for additional welfare spending, but if additional borrowing could facilitate investment, "then the answer might be different." Merz also advocates for tax cuts for entrepreneurial families and cuts to public spending. Recently, with the support of the Alternative for Germany, Merz passed an anti-immigration bill, but he refused to form a coalition government with the party, which is expected to receive 20% of the vote in Sunday's election. Therefore, Merz will have to form a coalition government with one or two parties (the Green Party and the Social Democratic Party) from the Scholz government. Residents call for relaxing the "debt brake," but the market may be too optimistic The debt brake refers to the requirement that the German federal government must control annual borrowing within 0.35% of GDP and prohibit the 16 federal states from increasing new debt unless under emergency circumstances. In recent years, as the German economy has faced challenges, many economists believe that the increasingly heavy political pressure demands reform of this overly rigid rule, and Merkel has also called for relaxing the "debt brake." Additionally, many German residents support overturning this strict borrowing limit, with 55% of Germans supporting overturning the debt brake according to a January poll, compared to only 32% last July. Currently, the market generally expects that if the election results can form a stable coalition government, especially a "grand coalition" composed of the Union parties (Christian Democratic Union/Christian Social Union) and the Social Democratic Party, it may temporarily relax Germany's fiscal austerity policy and promote some tax reduction measures. This policy adjustment is a positive signal for the economic recovery of Germany and even the entire Europe. However, if the Alternative for Germany and other small parties receive more than one-third of the vote, forming an obstruction minority, any fiscal or debt brake policy reforms may be put on hold, which could be negative for market sentiment. However, some analysts pointed out that the market is currently too optimistic about the German economy after relaxing the "debt brake." For example, Nicola Mai, sovereign credit analyst at The Pacific Investment Management Company (Pimco), stated that the market is overly optimistic about the possible changes in German fiscal policy, and the rise in German bond yields due to expectations of more borrowing to stimulate growth is "excessive". Similarly, from the perspective of the German stock market, investors are not very optimistic about the overall attitude towards the election. Barclays' report pointed out that although the DAX index has risen by 13% since the beginning of this year, this rise is mainly due to the performance of some internationally-oriented large companies (such as SAP, Siemens, Infineon, etc.) and large banks and defense stocks. In contrast, the MDAX index and Barclays' "German Renaissance Basket," which rely more on the domestic market, have lagged behind, indicating that investors lack confidence in whether the new government can successfully promote growth-oriented policies. This article is reprinted from Wall Street News, author: Jiang Zihan; GMTEight editor: Chen Wenfang.