Some Overlooked Continental European Gridlock

Editors’ note: MarketMinder is nonpartisan, favoring no party nor any politician, and assesses political developments solely for their potential effects on the economy, markets and personal finances.

In non-tariff news, some recent political developments in Germany and Spain have grabbed eyeballs. While the bluster has stirred up chatter about what these governments can and can’t accomplish, we think the underlying gridlock is an underappreciated positive for stocks.

At first blush, political gridlock may not seem optimal. It hinders legislators from passing laws—ostensibly their job—and tends to involve noisy squabbling. This can frustrate voters, many of whom want their elected representatives to take action to improve general living conditions. But from an investment perspective, gridlock can be bullish because it decreases the likelihood of legislative change.

Put on your investor cap. Companies generally prefer a political environment where the rules are stable, enabling them to more easily plan and take risk (i.e., invest). If a government can quickly and easily pass big rule changes, businesses would likely be more cautious in order to determine the costs and potential unintended consequences—which can discourage risk-taking. Even if one new law doesn’t affect them, the higher likelihood future laws could creates risk aversion.

Because gridlock decreases the likelihood sweeping changes become reality, it eases this uncertainty. Businesses can map out both costs and better project expected return on investment.

Now, this applies mostly to the developed world. Many nations in developing and emerging markets would likely benefit from passing and implementing reforms that boost competitiveness. But most major developed economies, including Germany and Spain, are already globally competitive. For countries with strong property rights and the rule of law, gridlock is a positive. And that positive reigns in Germany and Spain.

How Is Germany’s “Grand Coalition” Faring?

Since February’s federal elections, German Chancellor Friedrich Merz’s fiscal policy plans have cheered those who think public spending and investment are necessary to cure the country’s economic malaise. Merz got parliamentary approval for a €500 billion spending package—and a constitutional amendment permitting increased defense spending—in March, and the upper house greenlit a €46 billion package of tax breaks last week. This has boosted some German companies’ moods—see the June Ifo business outlook, which registered its highest reading in two years as government spending expectations outweighed US tariff worries.^[i]

But don’t overstate the benefits. As we wrote in March, government funding usually aids select industries or companies—a case of Berlin choosing winners and losers. Government funds also tend to trickle out slowly, so they are unlikely to provide an immediate economic jolt.

We also wouldn’t bank on many big legislative changes coming down the pike. Merz’s early wins required a lot of political capital—a limited resource. Moreover, cracks in his “Grand Coalition” are already emerging. Last week, some lawmakers from Merz’s Christian Democratic Union/Christian Social Union group refused to support the Social Democratic Party’s supreme court nominee—angering the coalition partner. The coalition has only a 13-seat majority in parliament—razor-thin—so Merz doesn’t have much wiggle room for dissenters.

That is a recipe for gridlock, which recent history shows German stocks don’t mind. The previous government was a gridlocked three-party coalition that ruled as GDP vacillated between growth and contraction from Q1 2022 through Q1 2025. Against that seemingly lackluster backdrop, German stocks (36.0%) outperformed global markets’ 21.6% return (in US dollars—when denominated in euros to account for the strong dollar’s skew, returns were 35.8% and 21.5%, respectively).^[ii] German stocks continue clocking new highs this summer, showing they clearly haven’t needed any sort of government “help.” We think the broad belief that they require additional “stimulus” for the foreseeable future is a sign of how low sentiment is today.

Another Spanish Corruption Scandal

In Spain, embattled Prime Minister Pedro Sánchez has taken numerous arrows, from April’s energy blackouts to squabbling with America over NATO spending. The latest controversy: a corruption scandal involving three senior figures in Sánchez’s Socialist Party. The PM is facing pressure from both the opposition and a few on his side to call a snap election—a demand he has resisted so far.

Sánchez’s plight isn’t new, nor are corruption scandals unique to him and his party. He entered government in 2018 because of previous PM Mariano Rajoy’s fall from grace after his own party’s corruption scandal. Sánchez has also proven to be a canny survivor. Go back to 2023, when he dissolved parliament and called an early national vote following the Socialists’ poor showing in local elections. Sánchez’s gambit paid off, as Spain’s fractured politics prevented the main opposition Popular Party from gaining a strong enough foothold—allowing Sánchez the chance to reform his minority government.

That minority government—which, by its nature, will struggle to do much legislating at all—remains in place today. Similar to Germany, we don’t see a do-little Spanish government as a negative for stocks. The MSCI Spain has been well ahead of global markets (61.0% to 37.8% in USD; when denominated in euros to account for strong US dollar skew, returns were 51.8% and 29.9%, respectively) since Sánchez reformed his minority government in 2023.^[iii] A snap vote, should one be called, could introduce some short-term uncertainty, but for now, Spain’s government is mired in bullish gridlock.