Germany’s Economic Struggles and the Looming Leadership Shift
As Germany prepares for its federal election, the state of its economy has become a central issue. The country, once a powerhouse of European economic stability, is now grappling with stagnating growth, rising debt, and pressures on key industries such as automotive and infrastructure. Critics of Chancellor Olaf Scholz’s government have seized on these challenges, blaming his policies for the lackluster performance. Meanwhile, Christian Democratic Union (CDU) leader Friedrich Merz, the frontrunner in the race, has vowed to reignite the economy with a fresh approach. However, analysts caution that the road to recovery may be far more complicated than Merz suggests.
A New Chancellor and an Old Economic Playbook
The CDU, along with its Bavarian sister party the Christian Social Union (CSU), is running on a platform that echoes traditional economic conservatism. Their agenda includes income and corporate tax cuts, reduced bureaucracy, and a focus on innovation, start-ups, and artificial intelligence. Merz has criticized Scholz’s policies as stifling growth and has promised that a CDU-led government would usher in a new era of prosperity. However, experts warn that the party’s plans may not be as transformative as advertised.
Carsten Brzeski, global head of macro at ING, notes that while the CDU’s intentions are clear, the details are lacking. For instance, the party has expressed a desire to boost investments in infrastructure, digitalization, and education but has yet to outline specific measures. Brzeski argues that the CDU’s approach is more about tweaking the existing economic model than overhauling it completely. He describes it as a “reform program which pretends that change can happen without pain.”
The Unrealistic Goal of 2% GDP Growth
One of the most ambitious goals of the CDU’s economic program, dubbed “Agenda 2030,” is to achieve gross domestic product (GDP) growth of around 2%. This target is intended to revive Germany’s sluggish economy, which has seen contractions in both 2023 and 2024. However, Geraldine Dany-Knedlik, head of forecasting at the DIW Berlin research institute, calls this goal “unrealistic.” Germany’s economy has been teetering on the brink of a technical recession, with the latest data showing a 0.2% contraction in the fourth quarter.
Dany-Knedlik also highlights the constraints imposed by the so-called “debt brake,” a constitutional rule that limits government borrowing. While the CDU has expressed reluctance to reform this rule, Merz has hinted at openness to some changes. However, increasing public investments within the current framework would require significant tax hikes, which could spark political and social backlash. As Dany-Knedlik puts it, the Agenda 2030 “reads more like a wish list than a straightforward economic growth program.”
How the CDU’s Policies Could Impact the Economy
Despite the skepticism, some economists acknowledge that the CDU’s policies could bring modest benefits. Franziska Palmas, senior Europe economist at Capital Economics, notes that tax cuts could bolster consumer spending and private investment. However, she cautions that the impact may be limited due to weak consumer sentiment. Many households may choose to save their extra income rather than spend it, while businesses may hesitate to invest due to economic uncertainty.
Moreover, not everyone would benefit equally from the CDU’s plans. Income tax cuts would disproportionately favor middle- and higher-income households, while lower-income families could be hit harder by potential reductions in social benefits. This raises concerns about widening inequality and whether the CDU’s policies will address the root causes of Germany’s economic woes.
The Challenges of Coalition Talks and Economic Reforms
The CDU is unlikely to secure an outright majority in the election, meaning it will need to form a coalition government. The most likely partners are the Social Democratic Party (SPD) or the Green Party, both of which have markedly different economic priorities. While the CDU wants to cut taxes and reduce regulation, the SPD and Greens advocate for higher taxes and stronger social safety nets. These ideological differences could lead to tense negotiations over the coalition agreement.
Palmas predicts that the CDU will likely emerge as the dominant force in any coalition, given its strength in the polls. As a result, the final agreement may lean heavily toward the CDU’s economic proposals. However, the party will still need to compromise on key issues, such as taxes and regulation. The success of any reform program will depend on the CDU’s ability to balance its ambitions with the realities of coalition politics.
A Cautionary Note: Economic Change Won’t Come Easily
As the election approaches, there is a growing sense that Germany’s economic trajectory is at a crossroads. While Friedrich Merz and the CDU have promised to restore growth and competitiveness, experts warn that the path forward will not be smooth. The challenges facing the German economy are deeply structural, from an aging population to the need for sweeping reforms in industries like energy and transportation.
Whether the next government delivers on its promises will depend on its willingness to confront these challenges head-on. For now, the CDU’s economic agenda offers a mix of optimism and uncertainty. While some measures may provide short-term relief, the long-term outlook remains unclear. As one expert put it, “increasing growth prospects substantially without increasing debt also seems rather unlikely.” Germany’s economic fate may ultimately hinge on its ability to navigate this tricky balancing act.
