Investing.com -- Barclays (LON:BARC) analysts have indicated that a center-right-led coalition is the most probable outcome for the upcoming German federal election set for February 23. The potential victory of the CDU/CSU alliance, possibly in partnership with either the SPD or the Greens, is expected to pave the way for pro-growth reforms.
These reforms may include corporate and income tax cuts, along with the establishment of a new public investment fund.
The manifestos of both potential coalition configurations suggest these measures, although the extent of such reforms remains uncertain due to the current constraints of Germany’s debt brake. This fiscal rule limits the ability of the government to increase deficit spending, which is a key consideration in the potential scale of the promised economic measures.
The prospect of fiscal expansion, while potentially beneficial for economic growth, could have mixed implications for the financial markets.
Barclays suggests that the anticipation of such reforms may have a negative impact on German government bonds, known as Bunds. Conversely, credit markets, stocks, and the euro might see more favorable conditions as a result of the proposed fiscal policies.
The pressure to increase borrowing, especially if the debt brake is relaxed, could lead to a relative underperformance of Bunds. A relaxation of the debt brake might trigger a cheapening pressure on Bund yields compared to swaps and contribute to the compression of spreads between the periphery countries of the Eurozone and Germany.
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