Since Wednesday evening, Germany’s three party coalition government of Social Democrats (SPD), the Greens and the liberal Free Democrats (FDP) is history. The collapse ocurred when Chancellor Olaf Scholz sacked Finance Minister Christian Lindner, from the FDP, prompting other liberals to step down from the cabinet.
Last week, an 18-page so-called position paper of Lindner’s was leaked to the public. In it he advocated for a moratorium on regulations and tax cuts, abolishing a solidarity surcharge in income tax for high-earners, and pushing back climate targets to 2050.
Most significantly, Lindner vehemently opposed suspending a constitutional ban on excessive borrowing — Germany’s debt brake — to plug a roughly €10 billion ($10.7 billion) hole in the federal budget for 2025. He also proposed to dissolve the Germany’s climate fund, with which the government is financing its green transition projects.
Lindner’s paper, titled “Economic transition for Germany — economic concepts for growth and inter-generational fairness,” sparked outcry from coalition government partners, who immediately refused to support these measures.
The SPD’s co-chairman, Lars Klingbeil, on Sunday described the document on Germany’s ARD broadcaster as “nothing more than neoliberal ideology.”
Felix Banaszak, the Greens designated co-chairman, told ARD: “This whole document breathes the spirit of ‘I actually don’t want to do this anymore’.” Banaszak added that reversing agreed-upon government decisions is “the opposite of providing planning certainty.”
Economic policy threatens German businesses
Ever since Scholz’s government took power in 2021, the German economy has been on a slippery downward slope, beset by multiple crisis like the COVID-19 pandemic and the war in Ukraine. In 2024, Europe’s biggest economy remains stuck in recession for the second year in a row.
More and more businesses are under pressure, and suffer from falling sales, high energy costs and taxes, and Germany’s overburdening bureaucracy.
Automotive supplier Bosch, for example, had to revise its 2024 outlook, and may consider further layoffs on top of the 7,000 jobs already announced. Last week, Bosch CEO Stefan Hartung urgently called on the governing coalition to end their disputes and quickly support the industry. “We need to move from talk to action now and implement specific measures before [next year’s] federal election to strengthen the economy in both the short and long term,” Hartung told German newspaper Tagesspiegel.
The Family Business Foundation — a lobby organization for Germany’s family-owned businesses — also criticized the government’s economic policy.
“The greatest risk for Germany as a business location is an incapacitated government,” Rainer Kirchdörfer, head of the lobby group, told Augsburger Allgemeine newspaper on Wednesday. Referring to two independently held meetings between government officials and business leaders last week, he added: “Discussion rounds won’t help. Given the deteriorating economic situation, we urgently need political decisions.”
Henning Vöpel, head of the Center for European Policy think tank, thinks Scholz’s government has “failed to put Germany’s economy back on a structural growth path.”
“Ultimately, the coalition failed at its own ambition by not developing a common understanding of progress. All three parties fell back into their partisan positions,” he told DW.
Bad time to be ‘sick man of Europe’
The German coalition collapsed on the very same day as Donald Trump was announced the winner of the 2024 presidential election in the United States. His second term in office is likely to bring more challenges to German politics, including issues such as security policy, trade and climate policy, and support for Ukraine.
Vice Chancellor and Economy Minister Robert Habeck from the Greens, therefore, warned in a public statement following the government’s collapse that “this is the worst time for the government to fail.” Noting that the end of the government “feels wrong and not right,” he added: “Its almost tragic on a day like this when Germany needs to demonstrate unity and action in Europe.”
ING Chief Economist Carsten Brzeski believes Germany is “less prepared” than it was after Trump’s first win in 2016. “After four years of stagnation and structural weaknesses, Germany is not only the ‘sick man of Europe’ but also more vulnerable than eight years ago,” he told news agency Reuters.
No quick fixes
With the German economy being in critical condition, economists are wondering to what extent government policies are to blame for the decline and what role global developments play in it? Vöpel says current economic conditions are the same for all countries, and still German growth has been “lower than in comparable countries for many years.”
“This suggests that the weak global economy isn’t the main issue but rather specific structural causes. It should be the government’s responsibility to identify and address these causes,” he told DW.
Overcoming structural problems in the economy with political measures takes time, he argued, but they can already have a positive impact “simply by being announced.”
“Therefore, policies aimed at improving expectations and location conditions can indeed have short-term effects,” Vöpel said, adding that subsidies for energy prices or grid charges could offer short-term relief for industries even though they “don’t solve the problem and don’t have structural effects.”
Refrain from ‘throwing billions around’
Vöpel has identified four priorities the truncated government coalition must take to bring the economy back on track. “First, stabilizing the energy transition, which is central to connecting climate protection with competitiveness. Second, reducing bureaucracy, which is a quick relief that doesn’t cost money. Third, implementing digitalization, which holds substantial productivity potential; and fourth, tax incentives for investments.”
Martin Gornig, director of industrial policy at the German Institute for Economic Research (DIW) in Berlin, calls for “systemic changes” that must be implemented not only in Germany but the entire European Union. “Germany is the [biggest] industrial nation in Europe and deeply rooted in it. Only a European industrial policy makes sense,” he told DW.
But Gornig, cautioned against taking action simply for the sake of it. “We must avoid throwing billions around without clear direction. We’re not on the brink yet,” he said, adding that what’s needed now was a “calm policy where businesses and consumers feel confident about what will happen tomorrow.”
This article was originally written in German.
