Quick Bite: New Hope for Germany?
Author: Paul Zwi
Centre-right leader Friedrich Merz is on track to become Germany’s next chancellor, with his Christian Democratic Union of Germany (CDU) party having won last weekend’s national election with just under 30% of the vote. Merz will need to form a coalition with at least one other party to form a government. Far-right party Alternative for Germany (AfD) came in second on its best result to date, with 21%. Chancellor Olaf Scholz’s Social Democrats (SPD) tumbled to their worst showing since 1945 with 16%, while the Greens scored 12% and the far left Die Linke party on 9%.
Friedrich Merz, likely to be the next Chancellor, is vastly different to Scholz and Angela Merkel. The 69 year old had a stellar legal career focused on M&A, was on the board of BlackRock Germany, and is a staunchly pro-business libertarian who supports Nato, the European Union and the liberal international order. He appears ready to make the hard decisions required to get Germany back on track.
Source: Google News
Why was Olaf Scholz’s government dealt with so harshly, and why was there such a strong shift to the right?
In the 1950s, 60s and 70s, Germany was seen as an economic miracle. But the years under Angela Merkel and then Scholz show how complacency and risk aversion are inimical to adaptation, flexibility and innovation.
As the Wall Street Journal noted following the election,
“A decade ago, Germany was the model nation. Its economy hadn’t just withstood the ascendance of China; it was thriving in its wake. Its balanced public finances stood out in a world of huge government debt. And while British and U.S. lawmakers were caught up in the culture wars, German politicians continued to practice the art of compromise.
Today, Germany has gone from paragon to pariah. Its economic model is broken, its self-confidence shattered and its political landscape fractured.” – WSJ (21 Feb 2025)
Europe’s former growth engine has shrunk for 2 years in a row, erasing the recovery made since the pandemic. Its manufacturing output is down about 10% over the same period and its companies, squeezed between rising energy costs and falling exports, are shedding thousands of jobs.
External causes have contributed to the mess, namely the war in Ukraine, US protectionism and China’s economic slowdown, but without doubt German leadership has mismanaged its response at every step. As long as Germany’s economy was growing, it was happy to brush aside the GFC, the eurozone debt crisis, and kick the can down the road, never choosing the hard reforms required.
Its response to global warming and the energy crisis is a classic lesson in ineptitude.
Germany was a pioneer in cutting CO2 emissions. It enacted its ambitious renewable energy law 25 years ago and aimed to become greenhouse-gas-neutral by 2045, earlier than most other nations.
Yet today, Germany’s CO2 emissions per capita are above the global and the European Union average, higher than the UK’s and France’s and just below China’s (source: Our World in Data). Meanwhile, German households paid the highest electricity prices in the EU in the first half of 2024, according to EU statistics.
One reason for this dismal record was Angela Merkel’s 2011 knee-jerk decision, after the Fukushima nuclear accident, to accelerate a planned phaseout of nuclear energy. It meant Germany needed more fossil fuel, including coal and Russian natural gas, as it ramped up renewables.
The US and European allies warned Germany it was too dependent on Russia. Yet Merkel stayed put in 2014, when Russia annexed Crimea. So did her successor Olaf Scholz when Moscow invaded the rest of Ukraine and began reducing gas deliveries, driving up prices and forcing Berlin to restart idled coal-fired plants. After a short extension over winter, Germany’s last 3 nuclear power plants went offline in April 2023, in the middle of an energy crisis that had begun to sink the German economy.
Of course, there were other egregious policy errors. Merkel allowing almost a million asylum seekers into Germany from the Middle East and North Africa was always going to inflame the far-right of German politics, and that is exactly what happened. Those migrants are today less likely to be working than Germans and more likely to commit crimes. Social cohesion has suffered, and resentment inflamed. The German federal government alone spends 30 billion euros a year on benefits for refugees and asylum seekers, which is more than half the country’s defense budget.
Culturally and in terms of business innovation, Germany is stuck in the analog age with virtually no global leaders in tech or AI. It is over-regulated, panders to every shrill NIMBY voice, and lacks the innovation and entrepreneurship that other countries are displaying. In 2023, Germany recorded 133,000 patent applications, less than half the numbers in South Korea and Japan (source: World Intellectual Property Organization). Most German patents were for mechanical and industrial applications, (whereas computer technology and digital communications dominate in the US and China respectively).
In a Financial Times editorial (25 February 2025), the following points are noted:
“The victory of Friedrich Merz and his Christian Democrats (CDU) in Sunday’s parliamentary election gives Germany a new opportunity to fix the crumbling foundations of its postwar success. Once a rock of stability at the centre of Europe, it now looks acutely vulnerable on multiple fronts. It can no longer rely on open markets abroad to sustain its export-led economy; it can no longer rely on a US security umbrella to keep it and its European partners safe from Russian aggression; and more and more Germans are losing faith in mainstream parties’ ability to deliver. As support for the political centre ground shrinks, it is growing for radical movements, above all the far-right Alternative for Germany (AfD), whose commitment to liberal democracy is questionable…
Berlin will have to unlock tens of billions of euros a year to sustainably increase defence spending, rearm, modernise its infrastructure, lower energy costs and invest in innovation. Unless Germany can raise its productivity and rebalance its growth model towards domestic consumption, Europe’s economic prospects and living standards will continue to fade. And without German heft, Europe has little chance of replacing US military assets quickly enough to avoid being dangerously exposed to a revanchist Russia. The continent really needs Merz to succeed.”
With an Australian federal election looming, let’s hope our political leadership can learn from some of these lessons and embrace necessary reforms and strategic planning while we still have the opportunity to do so.
