Germany’s conservative leader Friedrich Merz emerged as the winner in Sunday’s election, but the results gave his bloc just one clear path to power with intense pressure to move quickly to form a government.

While Merz’s CDU/CSU alliance won 28.6% of the votes, the only centrist two-party option for a majority in the Bundestag is to partner with Chancellor Olaf Scholz’s battered Social Democrats. Despite finishing third with 16.4% — its worst result since World War II — the center-left party will have significant leverage in coalition negotiations.

The far-right Alternative for Germany, or AfD, doubled support to become the second-strongest party with 20.8%. While the nationalist movement will be the dominant opposition party in the lower house of parliament, it will have little concrete power after Merz ruled out an alliance — and fell short of a blocking minority on its own.

Merz vowed to move quickly and avoid protracted coalition talks, which can often take months as parties wrangle over policy details and seek to secure control of key posts, such as the finance ministry.

“There’s no reasonable alternative to forming a government in Germany in a reasonable and timely manner,” Merz said late Sunday, adding that he wanted to form a coalition within the next two months. “The world isn’t waiting for us.”

The election comes at a delicate moment as Europe’s biggest economy contends with two years of contraction, Russia’s war in Ukraine and U.S. President Donald Trump threatening a global trade war that could hobble Germany’s struggling industrial sector.

During the campaign, Merz warned that if the incoming government fails to revive the economy and get immigration under control, then the AfD could well take power at the next election, putting Germany’s position in the European Union at risk.

German politics has become increasingly splintered, with five parties making it into the Bundestag this time around and another two nearly crossing the necessary threshold to get in. As the number of parties proliferates, the ability for those in the center to form a stable, effective government has gotten harder.

Alice Weidel, the AfD’s chancellor candidate, vowed to “hunt” the future governing parties and called policies that keep it out of power “undemocratic,” echoing comments made recently by U.S. Vice President JD Vance.

She made it clear that the AfD will seek to block changes to constitutional limits on borrowing, which rein in Germany’s ability to invest in defense and infrastructure, while managing its growing burden for pensions and welfare costs.

“A state may not spend more than it earns,” she said. “We have to cut back with an iron broom so that there is more money for the tax-paying population.”

What our analysts say:

“Mainstream parties don’t have the two-thirds majority that’s needed to reform the so-called debt brake to unleash more spending to tackle the enormous challenges of the moment.”

— Antonio Barroso, senior geoeconomics analyst, Bloomberg Economics (Bloomberg subscribers can click here for the full report)

DAX futures rose and the euro strengthened with results broadly in line with what was expected by markets. An Ifo institute index showed that optimism among German companies grew, fueling hopes of a turnaround.

Among the biggest losers in Sunday’s vote were Scholz and Christian Lindner, the head of the pro-business Free Democrats, which crashed out of the Bundestag. Vice Chancellor Robert Habeck, who led the Greens’ campaign, said he would step back from a leading role in the party.

All three paid the price for the public bickering that led to the collapse of Scholz’s three-party government. While the Greens fared better than the other two parties, it still lost more than three percentage points to get 11.6%.

The SPD is moving quickly to regroup. Scholz — who will continue as chancellor in a caretaker capacity — is stepping aside from a leading role in the party after failing to deliver the comeback he promised in the campaign. Defense Minister Boris Pistorius — the country’s most popular politician — is set to move to the forefront.

Party co-leader Lars Klingbeil will also take charge of the SPD’s parliamentary group. The 47-year-old was cagey about whether the party would agree to an alliance with the CDU, saying that the center-left group “needs a renewal” and indicating it would take a tough stance in negotiations with the conservatives.

The biggest potential points of friction between the CDU and SPD will likely be over social spending, migration and expected state financing to fund massive outlays to bolster the defense sector.

“I emphasize here that responsibility can be taken in a government, but also in opposition,” Klingbeil said. “The task of governing now lies with Friedrich Merz.”

Merz and Scholz may disclose more at press conferences on Monday to provide initial reactions to the election results and layout positions.

Lindner has already said he would leave politics, raising questions over the future of the business-friendly FDP, which has been a fixture of German politics in the post-war era.

The Left was one of the few winners in the election, gaining nearly four percentage points to 8.8%. The party survived the departure of Sahra Wagenknecht, who formed a pro-Russia splinter party that fell just short of securing enough support to make it into parliament.

The return of a so-called grand coalition of the conservatives and the SPD to power will provide a semblance of stability, with such an alliance backing three of Angela Merkel’s four terms. But its majority would be narrow.

Germany’s divisions were also laid bare by the voting results in eastern Germany. In the former communist region more than half of the electorate voted for fringe parties, with support for the AfD at nearly a third.

Germany urgently needs deep reforms to restore competitiveness of key industrial sectors. It remains particularly exposed to China’s economic woes and its trade surplus with the U.S. has drawn Trump’s ire.

“I know what great responsibility and the dimension of the work we now face,” Merz said.

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With assistance from Jana Randow and Iain Rogers.

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