(personal underlines)
Germany is running out of time to reform
Germany’s government after the election on 23 February will likely be led by pro-business Christian Democrat Friedrich Merz. His coalition partner, probably the Social Democrats of failed Chancellor Olaf Scholz, or else the Greens of economy minister Robert Habeck, will torpedo any serious economic reforms. Equally worrying: Merz’s own reform blueprint is far too timid.
A new wild card in the vote – up to now dominated by the economy – is spiralling migrant violence and failures of German authorities to lock up people known to pose acute threats. A horrifying knife attack on a nursery school group in a park in Aschaffenburg, in Bavaria, on Wednesday, allegedly by an Afghan man, killed a two-year old boy and a 41-year-old man who tried to protect the children. This follows the attack on a Christmas market in Magdeburg, reportedly by a Saudi man using an SUV, that killed six and injured hundreds on 20 December.
Reactions to the latest killings by Merz and other candidates have been harsh, but it’s too early to tell if this will upend campaigning and lead to a tougher German position challenging EU laws on migration.
The hustings have so far focused on Germany’s economy, which is in deep trouble after contracting in both 2024 and 2023. Merz, who’s among the few German politicians with international business experience from BlackRock and law firm Mayer Brown, should be an ideal leader to fix Europe’s biggest economy.
His Christian Democratic bloc, though leading all other parties, is stuck in the opinion polls at around 30 per cent. It will need a coalition partner. The far-right Alternative for Germany (AfD) is in second place with about 20 per cent and, if it was a normal party, would be the obvious ally. But the CDU and other German parties have vowed no coalitions with the AfD which is anti-EU, anti-euro, anti-Nato, pro-Russia, pro-China, anti-U.S. and plays down Hitler and the Nazis as “just a bird shit in over 1000 years of German history.”
Unlike France, where Marine Le Pen’s National Rally has moderated, the AfD is radicalising. At its party convention this month, members celebrated their leader, Alice Weidel, by chanting “Alice für Deutschland!” which sounds almost like the banned Nazi chant “Alles für Deutschland!” (Everything for Germany!) that an AfD regional leader was fined for using. Anti-migrant policy, the AfD’s political bedrock, has morphed into kicking out foreigners living in Germany, a plan it officially dubs “remigration.” Energy policy is also radicalising: Weidel calls for tearing down wind turbines which provide about 32 per cent of the country’s electricity.
“The AfD is getting more radical because it has never been tested in government, which usually tones ideologues down,” says Jan Techau, director Europe at the Eurasia Group, a political risk research firm. “The collective experience of the party is that you can make ludicrous claims and still win.”
Ruling out the AfD leaves only the SPD and the Greens as possible coalition partners for Merz. With the SPD at 16 per cent and the Greens at 13 per cent, a strong AfD result might even lead to a divisive four-party CDU-CSU, SPD, Greens alliance (The Christian Democrats have a separate Bavarian wing, the CSU, which delights in its role as the awkward squad.) To be sure, polls also show that 30 per cent of voters are undecided. There is room for an election day surprise.
Chancellor Scholz’s SPD and Greens, together with the liberal Free Democrats who were kicked out of government last year triggering early elections, were in power since 2021. Though the economy crashed on their watch, SPD and Greens are doubling down on their tax, energy and regulatory policies.
German business leaders blame Greens economy supremo Habeck for the misery; and over 80 per cent say he’s done a bad job, according to an Allensbach poll. Habeck’s qualifications to be minister of the world’s third biggest economy include a doctorate on how nature is depicted in literature and writing children’s books such as “Call of the Wolves” about kids saving a wolf from an evil hunter.
The survey of 500 German business leaders bluntly names “political measures” as the chief reason for Germany’s economic decline and says cutting red-tape and a major tax reform would be the best way to trigger a revival.
Merz’s own reform blueprint is far too timid
They may not get this. Germany’s highest income tax rate is already 45 per cent, but Habeck is campaigning for yet a new tax on investment income to fund public health insurance. The Greens seek de facto abolishment of German private health insurance. Almost 90 per cent of Germans have public health insurance, but private insurance plays a vital role in subsidising doctors and hospitals because it pays them more for procedures than the public system does. In 2022, the extra money amounted to 12.3 billion euros (£11 billion). Despite this, the Greens and the SPD want to axe the private system which they claim creates two-class medicine. The UK’s superbly functioning NHS seems to be their model.
The CDU’s Merz promises 2 per cent GDP growth per year based mainly on cutting both corporate and income taxes. Yet instead of a bold tax move to kick-start growth, Merz’s Agenda 2030 reform plan slow-walks tax cuts with modest steps over four years that would only start in 2026. Regarding Germany’s notorious debt-brake that strictly limits new government borrowing, Merz only hints he might back limited change. Pledges in the 14-page paper to cut Germany’s suffocating bureaucracy are vague and unambitious. Merz despises big-bang policy by leaders such as Argentinian president Javier Milei. “What (Milei) is doing there is ruining the country, trampling on the people,” Merz says.
The CDU says shortfalls caused by tax cuts would be compensated by increased tax revenue of 20 billion euros (£17 billion) yearly due to an expanding economy and cutting social welfare payments. Clearly, no political party in history has ever claimed that more tax revenue from projected economic growth will fund its tax cuts.
Even the conservative Frankfurter Allgemeine Zeitung has poured cold water on Merz’s plan by noting it fails to take into account the demographics of Germany’s swiftly ageing population and the refusal of the CDU to consider raising the retirement age. Sagging German corporate investment is a fatal sign, the newspaper says. “This shows how unattractive Germany is as a place to do business. More investment and a hoped-for productivity miracle need freedom, of which the U.S. has plenty, and Germany not enough.” In sum, Merz’s proposals underwhelm.
Scholz’s SPD, though it presided over the debacle of the past years, is campaigning on even more intensive application of much the same policies which it claims will yield better results. The chronic shortage of affordable housing in Germany was top priority of the Scholz government. A friend in Potsdam, which borders Berlin, recently listed an apartment for rent and got over 300 inquiries on the first day.
But the SPD’s signature policy of building 400,000 new apartments a year is in tatters. The Ifo Institute, a Munich-based economic think tank, projects 225,000 apartments being built in 2024, falling to 195,000 for this year and 175,000 for 2026.
Rent-price controls are still the SPD’s main answer to the shortage of apartments, even though this is the best way to deter private investors from building new rental units. Otherwise, the SPD promises tax cuts that will benefit what it says are 95 per cent of all tax payers, free school lunches and cuts in the ticket prices for public transport. It vows to pay for this by raising taxes on the top 5 per cent of earners in Germany.
Aside from migrant violence, we haven’t talked about Germany’s other problems to which the established parties have few answers: staggering costs to restore the armed forces amid Vladimir Putin’s threats to invade and Donald Trump’s threats to withdraw; the floundering energy shift to renewables; and acts of self-harm to the key auto industry.
With Germany set for half-baked economic reforms and other political and social problems bubbling over, the true election victor is likely to be the party that needs to lose to win.
Alice Weidel’s rightist AfD will profit mightily from more economic muddling through and all the rotten compromises on migration and in other areas that a Chancellor Merz will be forced to make with the SPD, the Greens or with both parties.
Weidel’s declared goal is to move the AfD from its number No. 2 position among voters into the front place as the strongest party in Germany.
“I won’t be able to do that by February 23rd. But I will be able to do it by the next federal election,” she said in a Neue Zürcher Zeitung interview.
Germany is rapidly running out of time to reform. If it fails now, then the 2029 elections may yield the political earthquake of a Chancellor Weidel.
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