Dealmakers in Germany are optimistic about M&A opportunities in the country’s defense and energy sectors after the Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), won Sunday’s election.

However, there is still a question mark hanging over Friedrich Merz’s stance on the EU’s glacial progress towards a Capital Markets Union (CMU).

The centre-right politician, who is likely to be the country’s next chancellor, has supported the creation of a single market for capital in theory, although his opposition to UniCredit’s [BIT:UCG] unsolicited approach for Commerzbank [ETR:CBK] suggests that he is far from a true believer in the project.

There is upside for German dealmakers if the CMU ever gets off the ground – truly pan-European banks would be able to offer more attractive financing solutions to the country’s famed Mittelstand, which comprises millions of small and medium-sized enterprises (SMEs) with industrial expertise and experience as exporters.

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Merz’s CDU/CSU won 208 seats in the 630-strong parliament. With 120 seats, the centre-left Social Democratic Party (SPD) can deliver a parliamentary majority to Merz as a single coalition partner, though negotiations to form a government may be hard going. Merz has said that he hopes to form a government by Easter, which falls in late April this year.

Defence is going to be the top item in Merz’s inbox if and when he becomes chancellor. He has said that Europe needs to prepare for the possibility that US President Donald Trump’s administration will no longer unconditionally support the North Atlantic Treaty Organization (NATO). He also said that Europe needs to prepare its effective independence from the US.

This will be tough. Germany’s trade surplus with the US reached a record level of EUR 70bn last year, a quarter of which came from automotive products.

Imposing tariffs of about 25% on imports of cars, drugs and chips into the US, as Trump is proposing for the EU, would hurt. The German economy shrank by 0.2% in 2024 and is predicted to only grow by 0.3% in 2025. Industrial output has decreased by 8% since 2021.

Dealmakers were already expecting a boom in European defence deals driven by increasing government spending across the continent, a theme reinforced by the US appearing to distance itself further from traditional allies at the Munich Security Conference earlier this month.

A joint venture between German arms group Rheinmetall [ETR:RHM] and Italian defence company Leonardo [BIT:LDO] was recently cleared by the German competition authority. Meanwhile, Rheinmetall has said that it sees acquisitions as its top priority for growth.

Energy is also likely to be a major theme for Merz’s new administration. Germany’s Mittelstand was helped for years by cheap Russian gas, which came to an end with sanctions. Germany has imported no Russian natural gas since September 2022, down from 32% of gas imports before Russia’s invasion of Ukraine. Meanwhile, electricity prices in the country for industry are significantly higher than the EU average.

The conservative CDU/CSU wants to halve electricity grid fees and reduce the electricity tax for energy-intensive industries, while also building grids, energy storage and increasing renewable energy sources.

Meanwhile, the SPD is also pushing for investments in green hydrogen as an alternative to fossil fuels in the heavy industry, according to its election manifesto.

However, Germany’s debt brake remains a contentious topic. This limits public investment; and a reform would require a two-thirds majority in parliament. Merz said today that he is considering tabling a motion in the outgoing parliament to loosen the strict borrowing cap.

Investors have been more cautious about deals in the energy sector in recent years with private equity investors refraining from exiting assets in the sector hoping for a more favourable market environment, one M&A advisor said.

There were only 71 deals in energy and utilities inked worth EUR 7.96bn in Germany in 2024 compared to 86 deals worth EUR 11.8bn in 2023, according to Mergermarket data. More clarity on the government’s policy regarding energy and the debt brake, could pave the way for an increase in deal flow in the sector.

Mergermarket’s auctions tool flags nine active sale processes in Germany’s energy sector. This includes a pre-launch of TenneT Germany, which could raise billions of euros for TenneT, a Dutch state-owned power network manager.