[Helmut K. Anheier] What Germany‘s next government must do

Horrible endings are better than never-ending horrors, or so the German saying goes. Many in Germany probably felt that way earlier this month, as they watched the collapse of the most unpopular government in recent German history, led by the most unpopular chancellor. The fierce political bickering that ensued was not particularly desirable, but it was better than more of the same.

Though the collapse of Chancellor Olaf Scholz’s “traffic-light” coalition -- Scholz’s Social Democratic Party (SPD), the Greens and the Free Democratic Party (FDP) -- was widely anticipated, it took many by surprise. Just hours after Donald Trump won the US presidential election, Scholz sacked his finance minister, the FDP’s Christian Lindner, and set the stage for a snap election, plunging Germany into political chaos.

Scholz and Lindner’s disagreement was straightforward. Scholz insisted that a larger budget deficit was essential to enable Germany to deliver aid to Ukraine (especially given Trump’s victory), increase investment in the country’s crumbling infrastructure and finance more subsidies for industries reeling from high energy costs. But Linder refused to take on more debt, as the German constitution limits the structural deficit to 0.35 percent of gross domestic product per year -- the equivalent, today, of some 9 billion euro ($9.5 billion). While the debt brake is not absolute -- larger deficits might be permitted during emergencies like the COVID-19 pandemic -- Linder did not see sufficient justification for overriding it today.

It is perhaps fitting that a budget spat brought down Scholz’s coalition, which was united in 2021 precisely by a plan to reallocate unspent funds that had been earmarked for the pandemic response. This would have enabled the three parties to advance their social and climate priorities without increasing the deficit. But last year, the Constitutional Court struck down the plan, effectively blowing a 60 billion euro hole in a budget that was already under strain from declining tax revenues.

The government’s reform plans -- embodied by a coalition deal entitled “Daring More Progress” -- did reflect an understanding of what Germany needed after 16 years of relative stagnation under Angela Merkel’s leadership. But some initiatives were introduced too hastily, and others are still awaiting implementation.

Still others were derailed by Russia’s full-scale invasion of Ukraine in 2022, after which Scholz proclaimed that Germany had reached a turning point (Zeitenwende) that demanded an epochal change in its politics and priorities. The competing pressures to make progress on pre-agreed reforms and achieve a fundamental policy reset -- combined with budget constraints and ideological differences -- ultimately tore the coalition apart.

The election, set to take place in February, offers a critical opportunity for Germany to do better. Current polls suggest that Friedrich Merz, the leader of Merkel’s center-right Christian Democratic Union, will become chancellor, leading either to a grand coalition with the SDP or some more complicated three-party coalition. In any case, it would be a centrist government, with the extreme parties of the right and left in opposition.

Merz appears likely to show leadership where Scholz did not, and to appoint more experienced and pragmatic Cabinet ministers, thereby avoiding the kinds of legislative mishaps that eroded support for the last coalition. But if he is to lead Germany out of the deep structural crisis that it faces -- especially in today’s tumultuous geopolitical environment -- he will have to focus on four key areas.

The first is the debt brake. Though this rule -- introduced by the CDU in 2009 under Merkel -- helps to keep German public finances stable, it also limits the government’s ability to invest in the future and to respond to emerging crises early and effectively. While Merz has made clear that he does not support abolishing the provision, he might be open to a compromise that balances these competing considerations. Since such a reform would probably involve constitutional changes, which require a two-thirds majority, a broad-based, cross-party consensus would have to be forged.

The second priority for Germany’s next government must be structural reform. Action is needed in many areas, including education, infrastructure, public administration, immigration and the digital and energy transitions -- all of which have long suffered from policy neglect or excessive regulation. Not all of the necessary reforms can be pursued simultaneously, even with a more flexible debt brake, so difficult choices -- and compromises -- will have to be made.

Then there is the European Union -- the third priority area. Both Germany and the broader EU are stuck in a kind of stasis, and they need each other to escape. The problem is that, although the single market has been in place for decades, leaders across Europe continue to allow national interests to define their economic, financial and regulatory policies.

The results are predictable: European financial markets and corporations lack the scale needed to compete with their American and Chinese counterparts. The next German government must face this weakness head on -- guided by recent recommendations from two former Italian prime ministers, Mario Draghi and Enrico Letta -- before growing populism in EU member states renders progress impossible.

Finally, Germany’s next government must move forcefully to strengthen national security. To this end, it must establish a national security council -- something the last government failed to do, owing to political infighting. Moreover, Germany must increase defense spending significantly -- well beyond the 2 percent-of-GDP threshold required by NATO -- and make public procurement more efficient and effective. And it must improve coordination among European forces. Rather than wait to be called out by Trump, Germany, together with France, must take the lead in making European strategic sovereignty a reality.

If Germany remains on its current path -- squabbling internally and muddling through -- its gradual decline will continue. But with effective political leadership offering both bold action and a steady hand, it can chart a new course toward greater security and prosperity.

Helmut K. Anheier

Helmut K. Anheier is a professor of sociology at the Hertie School in Berlin and adjunct professor of public policy and social welfare at UCLA’s Luskin School of Public Affairs. The views expressed here are the writer‘s own. -- Ed.

(Project Syndicate)