LIVE MARKETS-What to expect from Germany's new chancellor

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WHAT TO EXPECT FROM GERMANY'S NEW CHANCELLOR

As Friedrich Merz prepares to take office on Tuesday, Berenberg believes the new German Chancellor "will likely make a difference" poised to pursue a more assertive foreign policy while tackling the country's economic slump.

Economist Holger Schmieding expects Merz will leverage his "strong transatlantic, pro-European and pro-Ukrainian convictions" to deliver a more forceful foreign policy than his predecessor. He says a decision on sending Taurus missiles to Kyiv could serve as an early policy test.

He also suggests Merz could have a "better chance of getting along" with U.S. president Donald Trump thanks to his past business experience. Domestically, the primary focus is expected to be steering Germany out of nearly four years of stagnation.

Priorities are tighter immigration control, deregulation, digitalisation, modernising the state and a more rational energy policy, he says, adding that reforms will raise the long-term growth potential of the German economy above the current 0.4%.

Turning to European integration, Schmieding says modest progress on capital markets union looks likely, but he cautions against expecting support for widespread euro bonds, beyond a one-off special fund to help rebuild Ukraine.

"Permanent financing of European expenditures by common debt remains a red line for German conservatives, who already had to swallow hard when Merz crossed the domestic fiscal red line by loosening the debt brake," he writes.

(Danilo Masoni)

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