Germany’s next government: How much leeway for Friedrich “the Great”?

Will the upcoming federal elections in Germany, to be held on February 23rd, bring about an era of radical economic and social reforms, as demanded by leading economists, parts of the media and major industry associations? Or will the German electoral law, making absolute majorities almost impossible, force two or even three parties into a grand coalition unlikely to unleash truly disruptive policies? This is what observers are wondering about in Berlin and across the Federal Republic, from the North Sea to the Bavarian Alps as well as from the Rhein-Ruhr-area right into the former communist east, whose citizens nowadays increasingly vote for the far-right “Alternative for Germany”. And while the polls, by nature, are still offering an unclear picture, all of them unanimously see the Christian Democrats (CDU), hovering around 30 percent of the votes, as the election winner, with Friedrich Merz, the party’s chief, set to become Germany’s next Chancellor.

However, Merz, who measures close to two meters in body height, will have to team up with either the Social Democrats (SPD) or the Green party, unless – in case of a weak turnout of the Social Democrats – he even opts for a “Germany coalition”, binding together CDU (and her Bavarian sister party, the CSU), SPD and the Free Democrats (in party colours: black, red and yellow, like the German flag). Whatever the constellation, none of them will allow Merz to push through a purely pro-business, free-market-agenda incurring lower taxes, less bureaucracy or even the privatization of state-owned businesses. Rather, either potential partner (except for the Free Democrats) will force the 69 years-old to water down his claims and accept a demand-focussed, Keynes-inspired course, with higher taxes for the rich, higher minimum wages and more public debt. In fact, especially the SPD and the Greens demand an abolishment of the German “debt brake” which so far has prevented the government from borrowing more than 0,35 percent of GDP. The CDU/CSU’s and the Free Democrats’ adherence to this – in their eyes – golden budgetary rule notwithstanding, a compromise is likely to arise after February 23rd, paving the way towards higher infrastructure investments as well as an increase in defence spendings, both seeming undisputable in times of crashing bridges, a collapsing railroad network and mounting security threats.

The true trouble with a despondent, debt-backed rather than change-oriented approach is that it will further benefit the populists on the right. Already, the “Alternative for Germany”, under their leader Dr. Alice Weidel - a former management consultant who speaks Mandarin and grows up two adopted children together with her lesbian partner in Switzerland - has good chances to come in second, on February 23rd, with around 20 percent of the votes. The party, founded only 12 years ago (and recently endorsed by a certain Elon Musk as “the last rescue for Germany”), is becoming more and more accepted not only among frustrated “left-behinds” especially in the East of Germany, but also among entrepreneurs, craftmen and parts of the bourgeoisie, which have distanced themselves from the Christian Democrats ever since former Chancellor Merkel has shifted the party towards a “woke” center-left. In fact, an aggressive crusade against wokeism is a key pillar in the AfD’s campaign, next to their pro-Putin course concerning the war in Ukraine and calls to transform the EU into a rather loose club of sovereign nation states. And while it seems clear that none of the “established” parties named above will be willing to agree to any type of cooperation with the AfD after the upcoming elections, fears are rising visibly among political analysts that a weak performance of another centrist German government, especially concerning illegal migration, will clear the path for a victory of the AfD in 2029.

Unsurprisingly, recent developments in Austria where the failure to set up a coalition between the People’s Party (OeVP), the Social Democrats and the pro-market Neos forced Federal President Alexander van der Bellen (Greens) to ask the far-right party’s leader Herbert Kickl to form a government, have further boosted hopes among the AfD that they too may be handed over the keys to the German Chancellery in only a few more years. Against this scenario, it may make sense for the older parties in Germany to agree to an overarching alliance. In economic terms, though, a coalition treaty without dents has the potential to further worsen the current decline marked by a GDP growth close to zero, a decrease in industrial production, significant job cuts and weak exports. In the worst case, even the bond markets will set a question mark above the former EU powerhouse - tough times ahead for Friedrich the (not so) Great.