“We’re not out of the woods yet”

Friedrich Merz of the Christlich Demokratische Union party is set to become the next Chancellor of Germany, after capturing 29% of the projected vote. Now he must form a coalition.

Following the collapse of Olaf Scholz’s moderate coalition in November 2024, Germany has since triggered a snap federal election to decide its new government. Held on the 23rd February, the CDU has emerged with the largest vote share according to the official exit poll. This has occurred after years of burgeoning support for the Alternative for Germany (AfD), particularly in Eastern German regions over issues of immigration and culture. Despite Elon Musk extolling the AfD’s values on Twitter, Friedrich Merz has beaten them to second place. If he can form a coalition, he faces a complex challenge; repelling the AfD’s pressure to adopt hardline, hazardous policies on immigration, the EU and Ukrainian war, whilst also addressing Germany’s growing economic decline.

Whilst Merz can be expected to attempt a coalition with the Social Democratic Party (SPD), future negotiations have already been compromised by his recent cooperation with the AfD to pass an anti-asylum seeker motion in the Bundestag. With the liberal Free Democratic Party (FDP) having also lent its support, this was considered an act of trespass by the incumbent Olaf Scholz in January, stating “The consensus that democratic parties do not cooperate with the extreme right was broken today.". Whilst not an act that has entirely burnt the bridges between the centre parties, who often govern in coalition, SPD Housing Minister Klara Geywitz admitted that such actions have “damaged trust and complicated future discussions”.

Regardless, the SPD may have to look past this transgression, and further - with their vote share standing at 16%, they and the CDU alone may not hold enough seats to form a coalition. The Greens and/or the FDP may have to act as a supplement, with Merz having explicitly said “We will not cooperate with the AfD”, citing “fundamental” differences on economic and immigration policy.

Whilst immigration has often been the central issue, and adopted by the hard right for offensives on the political establishment, there are now several significant economic issues that are rearing their heads. Germany has seen two consecutive years of economic contraction - 0.3% in 2023 and 0.2% in 2024. Attributed to their prior reliance on Russian gas, and increased competition from China for industrial exports, this has manifested into a point of contention over Germany’s “Debt Brake”. This constitutional rule limits the federal budget deficit to 0.35% of GDP, a lock which many Keynesian critics accuse of hampering infrastructural investment. Rising needs for defence spending in the backdrop of the Ukraine war have intensified the debate on relaxing this debt brake.

Such a climate has had the heaviest impact on Germany’s automobile industry, as cheaper, energy-efficient Chinese EVs have penetrated the European market. Germany’s vehicle production now mirrors its performance in the 1980s, as major manufacturers such as BMW have all reported declining sales over 2024. This cornerstone of the economy has struggled to adapt to new battery technology and changing consumer tastes. Younger consumers are losing fealty to traditional brands and combustion energy in favour of the high-range, quality battery engines that Chinese EVs have to offer. They achieve this whilst undercutting equivalent German offerings in price, creating a potent value proposition - as the likes of Mercedes have already seen.

Energy production is also suffering, not least in the face of expected US tariffs. The combination of Germany’s decision to cut off nuclear power in 2023, and sanctions placed on Russian gas, have had them turn to American supply. 91% of their Liquefied Natural Gas is now sourced from America (Reuters). 

Then there is immigration, for which the AfD has been the most distinctly critical. Germany’s pensioners account for over a fifth of the population and rising; the use of controlled, skills-based immigration will be imperative to supplement the loss in the workforce.

Merz knows all this. His “Agenda 2030” involves a corporate tax reduction from 40% to 25% to accommodate supply-side reform. This may be vital to maintain the balance of the books. He intends to reverse the cutoff of nuclear energy and oppose the EU’s proposed ban on combustion engines set for 2035. These two could relieve Germany’s external energy reliance and its suffering automobile industry. Initiatives to reform social welfare, potentially cutting costs and reducing the deficit may meet resistance from the SPD. Nevertheless, Merz comprehends his country’s economic reality, indicating that his frontrunner status in the federal election has been deserved.

For now, he can breathe a sigh of relief at having seen off the AfD, whose economic policies would have exacerbated economic decline and threatened Germany’s international standing. Next, he must navigate the formation of a cohesive, coherent coalition, likely through rapport with the SPD and FDP, both who possess longstanding presence in government. Merz is aware that Europe expects a “strong government” and claims he will have formed one “by Easter”. Then, he can tackle the plethora of economic troubles plaguing the federation.

Beer and jubilation are flowing at the CDU headquarters tonight, yet tomorrow there will be a hard road ahead.