Some 22 years after losing a power struggle against Angela Merkel, Friedrich Merz will finally be chancellor. But can he save Germany? Chances are that he can. The vast majority of Germans knows that things cannot go on as they have for the last seven years. Although he won a far from convincing 28.5% of the vote on 23 February, that gives Merz a chance to explain the need for serious change.
He will face an uphill struggle to enlist his partners-to-be from the centre-left Social Democratic Party (SPD) for major reforms, especially as the heavily battered party of outgoing Chancellor Olaf Scholz may yearn for a period of soul-searching and a return to its roots first. But the almost unprecedented upheaval caused by US President Donald Trump could help him in his mission.
If Merz plays his hand well, he can do it. And he better succeed. This may be Germany’s last chance to prevent the pro-Russian and anti-European Union extremists from taking over. The parties of the extreme Right (Alternative for Germany (AfD)) and the Left (Die Linke and BSW) increased their share of the popular vote to 34.6% from 15.3% in 2021. If the German mainstream parties of the centre-Right and the centre-Left do not get their act together now, the extremists may win power next time.
Immigration, Russia and the economy
Merz seems to have a clear idea of the three big things that need to be done.
First, Germany must regain control over who lives in the country. Uninvited migrants should be turned back at the German (or EU) border or be shown the door unless they genuinely qualify for asylum. That is the only way to rebuild popular support for inviting and attracting the qualified immigrants the country needs to cope with its worsening lack of labour. Uncontrolled immigration is one of the top issues that right-wingers from Trump to Nigel Farage, leader of the UK Reform party, and Alice Weidel, AfD co-leader, regularly exploit to win popular support for their backward-looking agendas.
Second, as the pivotal power in the middle of Europe, Germany must lead or at least co-lead the European response to Russia’s brutal aggression against Ukraine and to the apparent affection between Russian President Vladimir Putin and Trump. That requires a major and lasting increase in German defence spending and a readiness to finally send Ukraine the weapons it needs to survive.
Third, after three years of stagnation, the German economy is at risk of returning to the dismal state of the late 1990s and early 2000s for which I coined the term ‘sick man of Europe’ in 1998, some months before it made it onto the cover of The Economist. Germany now needs reforms as thorough as those of the erstwhile ‘Agenda 2010’ that laid the basis for what I dubbed ‘Germany’s golden decade’ of 2010-19.
Merz can be a leader. In a spectacular turnaround from the hardline position on fiscal prudence on which he had campaigned, he is now exploring the idea of topping up the German special fund for the military by €200bn. This requires a change to the debt-brake provision in the constitution.
As the pro-Ukraine mainstream parties will no longer have the needed two-thirds majority to do so in the new parliament, he has proposed to convene the old parliament for that purpose before the new assembly takes over on 25 March. In the old parliament, the mainstream parties still have the votes for it. If he can get SPD and the Greens to support him, this would send a strong message to Trump and Putin that Germany is rising to the challenge of paying for its own defence – and that it will stand by Ukraine.
Courage for a grand compromise
Coalition talks with the SPD will not be easy for Merz. Apart from vague promises of cutting red tape, the platforms of the Christian Democratic Union/Christian Social Union and SPD have little in common when it comes to precise measures to revive the flagging economy. A lot will depend on his negotiating skills.
If Merz plays his hand well, he could manage to gradually cut business taxes from almost 30% to 25%, ease regulatory burdens, including reporting requirements, and streamline some planning and approval procedures. He could also pursue a more rational immigration policy (more pushbacks of uninvited immigrants coupled with faster procedures for the qualified immigrants Germany needs) and adjust energy policy with a focus on building out the grid and storage facilities (but without granting any permits for nuclear reactors).
But in order to get the SPD to support such key elements of a pro-growth reform agenda, he will also have to make major concessions to the centre-Left. Most importantly, he should offer the SPD support for a more far-reaching overhaul of Germany’s excessively tight fiscal straitjacket (the debt brake). In addition, he could accept a headline SPD demand to raise the minimum wage in stages from €12.82 per hour to €15. That would hurt some smaller businesses. However, the companies that count for Germany’s international competitiveness such as the ‘hidden champions’ of the Mittelstand would not be affected much. They pay well above minimum wage anyway.
If Merz forges a ‘grand compromise’ in which both the CDU/CSU and SPD ditch some of their cherished but outmoded positions in return for a few key policy changes in areas that really matter for them, Merz could indeed put Germany on the right track again. Good luck, Friedrich. The world needs a stronger and self-confident Germany.
Holger Schmieding is Chief Economist at Berenberg.
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