Germany: Approaches to Political and Economic Crises

Disagreements among the three parties forming Germany’s “traffic light” coalition government led to its collapse. Chancellor Olaf Scholz officially announced that he would request a vote of confidence from parliament on December 16 to authorize the current interim government to run the country until the early parliamentary elections scheduled for February 23, 2025. The “traffic light” government, formed on December 7, 2021, includes the Social Democratic Party (SPD) led by Scholz, the Free Democratic Party (FDP) led by Finance Minister Christian Lindner, and the Greens led by Economy Minister Robert Habeck. The government coalition collapsed due to sharp disagreements and differing views on economic policy between Lindner and Scholz, resulting in Lindner and his FDP withdrawing from the coalition. Consequently, the government lost its majority and had to seek a vote of confidence from parliament to manage affairs until the elections.

Economic crisis and debt brake

The disagreement over the approval of the public budget for 2025 was central to the coalition conflict. Finance Minister Lindner refused to stray from his party’s “liberal principles” and declined to accept his coalition partners’ approach of increasing borrowing, which would necessitate suspending the “debt brake” to address the significant budget deficit. This deficit is derived from challenges faced by the German economy, including repercussions from the coronavirus pandemic, the war in Ukraine, an influx of millions of refugees, and declining export momentum and competitiveness of German goods in the global market.

Moreover, the state has been compelled to invest in building and upgrading the German military, allocating a fund of 100 billion euros (which may require an additional 50 billion euros), along with urgently maintaining and renovating the country’s infrastructure—such as bridges, roads, schools, hospitals, and housing units—and modernizing the industrial sector to remain competitive globally. Some estimates suggest that Germany will need 780 billion euros by 2030, making it extremely challenging to secure these funds if the current economic state persists. Consequently, the government might face the need for austerity measures and drastic reductions in spending to meet these financial requirements.

Lindner remained resolute in his decision to reject covering the deficit through borrowing and to suspend the “debt brake,” citing constitutional provisions that prohibit exceeding this rule and limit the budget deficit to 0.35 percent of GDP. Conversely, Chancellor Scholz intended to suspend this rule, increase borrowing, and declare a state of emergency, effectively breaking the “debt brake” rule established by Angela Merkel’s government in 2009 to curb excessive government borrowing after the 2008 global financial crisis.

Lindner aimed to implement broad and urgent economic reforms to revitalize the economy without burdening the industrial sector and businesses with additional taxes and financial obligations. His plan included introducing a “liberal” reform package focused on reducing taxes for industrialists, business owners, workers, and small middle-class earners, simplifying the tax system, and reducing bureaucracy and state intervention in the economy.

This state interference surged significantly during Green Party’s Robert Habeck’s  time as Economy Minister. His policies to promote renewable energy and diminish reliance on gas placed a heavy burden on the industrial sector and the general populace. These actions adversely affected the FDP’s popularity, with many voters accusing the party of abandoning its liberal principles in favor of the Greens to retain power. The FDP’s popularity plummeted from 11.04% in the 2021 parliamentary elections to an expected 4% in the upcoming February 2025 elections, according to recent polls in 19th of November 2024.

A new phase of turmoil and tension

With early elections confirmed for February 2025, anticipation and anxiety dominate the political and media landscape in Germany. Regardless of the next government’s identity and direction, negotiations to form a coalition will likely take several months, leading to increased turmoil and tension, especially in the industrial, financial, and investment sectors.

The latest polls indicate that the Christian Democratic Union (CDU) will receive around 32% of the vote, the right-wing Alternative for Germany (AfD) 19%, the SPD 16%, the Greens 10%, and Sara Wagenknecht’s coalition 8%. The FDP and the Left Party are expected to secure only 4%, which would prevent them from entering parliament due to the 5% threshold.

Based on these projections, the next government is likely to be a coalition between the CDU, SPD, and the Greens, given the CDU’s leader Friedrich Merz’s refusal to ally with the AfD and the Wagenknecht coalition, despite their closer alignment in terms of agenda and economic solutions.

Given the CDU’s stance, both the SPD (Scholz’s party) and the Greens (Habeck’s party) feel relieved at the prospect of being part of the next government, even as their popularity has dwindled due to poor performance within the current “traffic light” coalition. The SPD’s popularity has fallen from 25.7% in 2021 to 16%, while the Greens, who previously garnered 14.7%, are now projected to receive around 10%.

The AfD and Wagenknecht’s coalition are actively using social media to highlight the implications of the collaboration among the “old parties” and “ruling oligarchs,” arguing that the distinction between their political programs has vanished and that their alliance serves self-interests aimed at sidelining the AfD and Wagenknecht’s coalition. They assert that current policies have led to economic decline, worsening living standards, increased poverty, and challenges arising from migration, including integration issues and the rise of Islamic extremism and rejection to the German values. These claims significantly influence public opinion and contribute to the declining support for traditional parties.

This turbulent political landscape is indeed impacting Germany’s economy and industries. Concerns have heightened following Donald Trump’s victory in the U.S. presidential election, with Germany fearing a deeper recession if Trump follows through on promises to impose tariffs of up to 20% on goods imported from Europe. Estimates suggest that German exports to the U.S., valued at $170 billion annually, would be severely affected by these tariffs. Consequently, many factory owners and investors may consider relocating from Germany to other countries, especially the U.S., to escape internal and external constraints that have diminished their profitability.

Most outstanding issues in Germany seem chronic and resistant to resolution, stemming from the weaknesses of coalition governments, the similarities in the plans of the participating parties, and their reluctance to confront the country’s political and economic challenges. Recent coalition governments have shied away from implementing radical and lasting solutions, opting instead for crisis management and leaving major issues for future administrations. Without resolving economic problems, modernizing infrastructure, improving citizens’ living conditions, addressing asylum and migration issues, combating corruption, effectively managing the coronavirus pandemic, and establishing a clear national strategy regarding the war in Ukraine, crises will continue to evolve and worsen. As a result, traditional parties may experience a persistent decline in popularity in favor of the right-wing Alternative for Germany, which is gaining support from increasingly discontented voters with each election.