Germany’s New Government Faces Daunting Challenges After Friedrich Merz’s Victory
A Victory Short on Celebration: The Economic and Political Hurdles Ahead
Friedrich Merz and his center-right Christian Democrats (CDU) have emerged victorious in Germany’s election, marking a significant shift in the political landscape. However, the celebrations for Mr. Merz, who is likely to become the next Chancellor, may be short-lived. The incoming government inherits a stagnant economy, the lingering impacts of the war in Ukraine, and the looming threat of tariffs on Germany’s critical export industries, courtesy of former U.S. President Donald Trump. These challenges are compounded by strict limits on government debt and deficits, which restrict the ability to finance essential spending on military, infrastructure, and economic initiatives that economists deem crucial for growth.
The debt brake, a constitutional rule limiting government borrowing, has already played a pivotal role in German politics. It was a central issue in the collapse of Chancellor Olaf Scholz’s government, leading to the early election. Relaxing this rule would require a two-thirds majority in Parliament, a daunting task given the election results. The Christian Democrats and their potential coalition partners, the Social Democrats, would need the support of other parties to achieve this, but the presence of extremist parties like Die Linke and the Alternative for Germany (AfD) in Parliament could block such efforts.
The Debt Brake Dilemma: Balancing Fiscal Discipline and Economic Necessity
The debt brake, a rule designed to ensure fiscal discipline, has become a focal point of debate. While it has kept Germany’s public debt ratio at a manageable 60% of GDP—far lower than in countries like the U.S., Britain, and France—economists argue that it now stifles the government’s ability to respond to urgent economic needs. The Bundesbank, Germany’s central bank, has suggested that the borrowing limit could be adjusted to meet changing conditions, given the country’s low debt levels. However, any constitutional amendment to ease the debt brake would require a two-thirds majority in Parliament, a challenging threshold to reach.
The political landscape after the election complicates matters further. The Christian Democrats and Social Democrats, who together won 328 seats, would still need the support of other parties to secure the necessary majority. The extremist parties, Die Linke and AfD, have enough seats to block any constitutional changes, limiting the options for the new government. Mr. Merz has already ruled out cooperation with the AfD, leaving Die Linke as a potential, albeit unlikely, partner. Die Linke’s opposition to increased borrowing could further hinder efforts to boost military spending, a key priority for the incoming government.
A Call for Economic Revitalization: Responding to Global Pressures
Beyond the debt brake, the new government faces pressure from business leaders to help Germany compete in an increasingly competitive global market. Chinese rivals are challenging German dominance in key industries like cars and machinery, while the threat of new tariffs from the Trump administration looms over the country’s export-oriented economy. Business leaders are calling for a stable government and a comprehensive economic turnaround, urging policymakers to focus on growth-friendly measures such as lowering energy costs, cutting regulations, investing in infrastructure, and accelerating the digitization of public services.
Economic growth has also been hindered by political uncertainty, which has paralyzed decision-making and discouraged investment. Nearly a third of voters polled before the election expressed support for a “grand coalition” between the Christian Democrats and Social Democrats, a partnership that had previously provided stability under Chancellor Angela Merkel. However, the challenges facing Mr. Merz’s government are far more complex than those faced by his predecessors, requiring bold and innovative solutions to revitalize the economy and secure Germany’s position in an uncertain global landscape.
Navigating the Political Minefield: Coalition Challenges and Constitutional Debates
The political landscape after the election presents significant challenges for Mr. Merz’s government. The Christian Democrats and Social Democrats, who together hold 328 seats in the 630-seat Parliament, will need to rely on other parties to achieve the two-thirds majority required for constitutional changes. The presence of extremist parties like Die Linke and AfD, which have enough seats to block any amendments, further complicates the situation. Mr. Merz has ruled out cooperation with the AfD, leaving Die Linke as a potential, albeit unlikely, partner. Die Linke’s opposition to increased borrowing could further hinder efforts to boost military spending, a key priority for the incoming government.
The Greens, who won 85 seats in the election, have proposed a possible solution: using the 30 days remaining in the current Parliament’s term to pass legislation easing the debt brake or establishing a special defense fund. Mr. Merz has indicated openness to considering such a move, pointing to Parliament’s previous use of the post-election window to pass laws related to military missions abroad. However, economists and politicians, including outgoing Finance Minister Jörg Kukies, have questioned the timing and democratic legitimacy of such a move. With the 2025 budget already facing a €13 billion hole, the pressure to find a solution is mounting.
The Path Forward: Stability and Growth in an Uncertain World
As Mr. Merz prepares to lead the new government, the challenges ahead are undeniable. The stagnant economy, the ongoing war in Ukraine, and the threat of tariffs from the U.S. all require immediate attention. At the same time, the debt brake and the political paralysis it has caused must be addressed to unlock the funding needed for military spending, infrastructure upgrades, and economic initiatives. Business leaders are calling for a stable government and a genuine economic turnaround, emphasizing the need for policies that strengthen growth and competitiveness.
The new government will also need to navigate the complex political landscape, finding creative solutions to overcome the blocking power of extremist parties and secure the necessary support for constitutional changes. While the path forward is fraught with challenges, there is also an opportunity for Mr. Merz and his government to chart a new course, one that balances fiscal discipline with the urgent need for investment and innovation. The success of this effort will not only determine the fate of the current government but also shape Germany’s role in an increasingly uncertain global economy.
