Unpredictable America, uncontrollable Russia, ungovernable Germany: that is the outcome that potentially lies ahead after the 23 February German general election. With fractious coalition-building in store, several weeks if not months are likely to ensue before Germany has a new working government under the probable new chancellor, Friedrich Merz, leader of the centre-Right Christian Democratic Union.
There is little prospect of a short-term revival in Germany’s stagnating economy or stronger European leadership in crucial security issues during the most crisis-ridden period in the Federal Republic’s 80-year post-second world war history.
Upheaval in post-war geopolitical landscape
Political wrangling in the continent’s former powerhouse economy, and the shock to the collective European system through continued provocation from Donald Trump’s new US administration, are likely to keep investors on edge and the euro under pressure.
Germany’s political players are trying to come to terms with dawning realisation of an upheaval in the post-war geopolitical landscape that secured peace in Europe since 1945 and enabled German reunification in 1990. The last few days’ developments – including the Trump-enabled emboldening of Russian President Vladimir Putin and a likely peace deal between Ukraine and Russia without direct European involvement – are exerting enormous influence on the final stage of the election campaign.
Coalition arithmetic disrupted by US-Europe schism
Merz’s probable new job has been clear since the election was called following the collapse of Chancellor Olaf Scholz’s embittered three-party coalition in November. However, sensitive coalition arithmetic has been disrupted by the growing schism between the US and Europe over the start of bargaining over ending the war in Ukraine.
Fragmentation of the popular vote, personal animosity among potential coalition partners and deep divisions over economic, social, energy, defence and immigration policies greatly impede Merz’s future task of assembling a cohesive government.
The CDU and its Bavarian sister party, the Christian Social Union, have maintained a constant lead in the polls at around 30% to 32% of the vote. The far-Right anti-euro, anti-immigration Alternative for Germany (AfD) stands second at around 20%, with Scholz’s Social Democratic party (SPD) at around 15%. The Greens and the liberal Free Democratic Party, the two junior partners in Scholz’s failed collation, are at 12% and 4% to 5% respectively, with 5% representing the threshold for entering the Bundestag.
The wide gap between first- and second-ranking parties is a rarity in German federal elections. Yet very few polls since the first electoral contest in August 1949 have been beset by so much uncertainty about what happens next. A key issue will be amassing a two-thirds majority in the Bundestag for reforming the constitutionally enshrined ‘debt brake’, which limits general government borrowing in normal circumstances to 0.35% of gross domestic product.
Backed by wide swaths of foreign economic opinion, Scholz’s SPD and other left-of-centre parties are fierce advocates of changing the parameters, above all to provide more leeway on defence and prevent deep welfare cuts. The Bundesbank will present debt brake reform plans after the poll to give greater headroom for infrastructure investment.
Political and personal fault lines include the CDU/CSU’s refusal to enter into any formal alliance with the AfD, the CSU’s strong anti-Green animosity and trenchant opposition to Merz within the SPD, the CDU/CSU’s most likely coalition partner. Merz has not ruled out reform, although he wishes to axe some social spending programmes first – anathema to many in the SPD.
Need to raise defence spending
Under strident pressure from the US, nearly all parties accept the medium-term need to raise defence spending to well beyond the currently mandated 2% of GDP. But there is no consensus on how this should be financed, with wide disagreement over the diverse options of tax increases, social spending cuts and debt financing. The Cologne-based German Economic Institute (IW) concludes that none of the parties’ political pledges can be financed without major budgetary savings.
The CDU promises tax reductions of almost €90bn while the SPD favours €30bn, the FDP €138bn and the Greens €48bn. No party has made specific financing proposals, except for more taxation of higher incomes and capital by the Greens and SPD.
Merz’s promises to overhaul economics, taxation, security and migration policies are bound to be curtailed by partners from Scholz’s former coalition not wishing to change course.
However, Merz’s hand will be strengthened if the CDU/CSU receives more than 30% of the vote. With his plan to curtail migration, and implement other restrictions such as cancelling the immigration bill introduced by the Greens and SPD before their government failed, he might have more room for manoeuvre on cutting social spending. This would give him more leeway for other economic and security policies.
The AfD has been galvanised by a string of attacks on the public over the past year by individual radicalised immigrants from the Muslim world, as well as by direct support from the Trump administration, notably last week in Munich from JD Vance, US vice president. However, US backing for the AfD – a Putin-favouring party with strong anti-American elements – may well rebound on the far-Right by increasing the turnout for established parties on 23 February.
David Marsh is Chairman of OMFIF. Andreas Meyer-Schwickerath is a Berlin-based OMFIF adviser.
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