The euro rose above 1.05 against the US dollar, its highest in two months, after German elections gave Friedrich Merz a lead. European stock markets also rallied on Monday as investors looked to the outcome of the German election to produce a favorable coalition that would accelerate economic reform and bring about a fundamental change in Europe’s largest economy. The new government will also have to address US President Donald Trump’s tariff threats and his calls for Germany to increase defense spending.
Both the euro and the German stock markets are likely to see positive momentum according to many analysts as the new government is expected to create the conditions for Germany’s economy to attract more investment funds to the country.
The euro began to recover against the US dollar after falling to just above 1.02, its lowest since November 2022 – when Donald Trump announced his first set of tariff plans, including 25% tariffs on Mexico and Canada and a 10% tax on Chinese goods. Despite the lack of direct export costs for the European Union, these tariffs significantly affect European businesses, which are widely exposed to global trade.
Germany’s economy shrank for two straight years in 2024, struggling with rising energy prices due to the Russian invasion of Ukraine.
Meanwhile, government spending restrictions have led to shrinking investment and limited military expansion, leaving Europe’s former economic powerhouse stagnating. While the final outcome will depend on cross-party negotiations, a coalition government formed by the CDU/CSU and SPD, which could be joined by a third party, the Greens, is expected to pave the way for reform of Germany’s “debt brake,” a fiscal rule adopted in 2009 that limits government borrowing by capping the budget deficit at 0.35% of the country’s gross domestic product (GDP).