Friedrich Merz and his center-right Christian Democrats celebrated a win in Germany’s election on Sunday. However, their triumph might be short-lived. As Merz steps up to the role of chancellor in the new government, he faces a slew of challenges, including an economy that’s not growing, the looming threat of tariffs on Germany’s vital exports from President Trump, and the ongoing conflict in Ukraine, now entering its fourth year.
Complicating these issues is the country’s stringent control over government debt and deficits, limiting financial freedom required to boost military spending, revamp outdated infrastructure, and initiate projects deemed necessary by economists for economic growth.
A key point of contention has been the “debt brake,” a rule that cost the previous Chancellor Olaf Scholz of the center-left Social Democrats his government, leading to this early election. To alter this rule would necessitate a two-thirds majority in Parliament to amend the Constitution, a difficult feat given the recent election results.
Already on Monday, there were voices from various corners—politicians, economists, and even the usually conservative central bank—urging the new government to reconsider these financial constraints in light of urgent national economic needs.
“In principle,” noted the Bundesbank in a Monday report, “it’s sensible to adjust the debt brake’s borrowing constraints considering the changes, especially while public debt levels are relatively low.” Indeed, Germany’s debt stands at just over 60% of its GDP, significantly less than countries like Britain, France, and the U.S., where debt is near or exceeds 100% of GDP.
Nonetheless, after Sunday’s election, forming a stable government looks complicated. Mr. Merz plans a coalition with the Social Democrats, which together hold 328 seats, falling short of the two-thirds majority in the 630-seat Parliament needed to amend constitutional rules.
Parties like Die Linke on the left and Alternative for Germany (AfD) on the right have enough seats to block changes, thus narrowing government options. Notably, Mr. Merz has ruled out partnerships with the AfD, leaving him to convince Die Linke, which typically opposes increased borrowing to hike military spending.
In a twist, the Green Party, which secured 85 seats, has suggested another route. On Monday, they proposed that Mr. Merz collaborate with outgoing parties—the Social Democrats, Greens, and Free Democrats (absent in the next Parliament)—to either establish a special defense fund or ease the debt brake within the remaining 30-day legislative window.
Mr. Merz has not commented directly on this proposal but showed a willingness to entertain such discussions. He pointed out that past Parliaments leveraged the post-election period to pass pressing military-related laws.
“Our discussions aren’t finalized yet,” Merz remarked, emphasizing the German military’s need for “considerably more funding.”
Yet, there’s skepticism regarding the timing and democratic validity of this potential move. Among the critics is Jörg Kukies, the outgoing finance minister and a Social Democrat. He expressed concerns, stating, “First, time is too limited. Second, changing the constitution now, with an outgoing majority, sends questionable political signals.”
Beyond tweaking the debt brake, there’s pressure on the government from business circles to help German industries hold their ground against Chinese competition in sectors like automobiles and machinery, historically dominated by German firms, and to brace against potential new tariffs from the Trump administration.
The BDI, a key industry lobby group, underscored on Monday the urgent need for stable governance and a genuine economic overhaul. “Minor adjustments no longer suffice given the severity of the situation; policies must concentrate on invigorating growth mechanisms,” its statement reads.
These growth stimulators, identified by industry stakeholders and economists, include reducing energy costs, alleviating burdensome regulations, channeling investments into infrastructure, and accelerating the digitization of public services.
Germany’s economic momentum has also stagnated due to political gridlock and the anxiety it breeds. In a pre-election poll, nearly a third of voters preferred a “grand coalition” between Merz’s party and the Social Democrats, akin to the arrangement under Chancellor Angela Merkel for most of her 16-year tenure.
