How Europe's new sick man was Germany

Germany's Keir Starmer, Friedrich Merz, doesn't seem to be able to address the nation's pervasive economic issues

What takes place next?

How are things in Germany?

The country has a relatively new leader who was chosen on the basis of muted enthusiasm, or at the very least, the belief that he couldn't be as awful as the previous group, but who has already shown himself to be a letdown. He doesn't seem to be able to address the nation's pervasive economic issues, and his government is becoming weaker every day. That's Keir Starmer from the British center-left, then. Friedrich Merz, a member of the German center-right, is another. Merz's coalition is plagued by infighting, policy deadlock, and declining poll ratings after just six months in office. The largest party in the coalition, his CDU/CSU bloc, hasn't declined as sharply as Labour. However, its support has dropped to 25%, a record low for the country's ruling party, and it is currently trailing the far-right AfD in polls. Less than one in five Germans want Merz to run again after six months. "There has never been such widespread dissatisfaction with a government in such a short period of time," claims Manfred Gullner, a pollster for Forsa.

Why is everything so gloomy?

Mostly, it's a growing realization that Germany's basic fiscal and economic issues cannot be resolved by the government. For the past three years, GDP growth has been essentially stagnant, and there was some initial hope that the Merz administration would provide the necessary boost. As chancellor-elect, Merz negotiated and pushed through a historic package of fiscal reforms in the spring that partially freed Germany from its self-imposed constitutional "debt brake" with the help of the departing Bundestag. Infrastructure and defense spending are now exempt from the brake, which caps public borrowing at 0.35 percent of GDP in any given year (but not in other areas). His administration announced significantly increased defense spending, established a 500 billion infrastructure and climate fund, and adopted a form of Keynesianism. It was hoped that this audacious move would spur development and portend more reforms. But there are significant issues.

What issues is Friedrich Merz's administration dealing with?

Vulnerability in politics. Merz, who turned 70 this month, is increasingly likely to have pushed through his most significant reform before he was even appointed chancellor. Germany's centrist parties still had the two-thirds majority required to change the constitution in that departing Bundestag. Merz's coalition, on the other hand, has a very narrow majority, making a similarly drastic constitutional change improbable. That alliance, meanwhile, is already openly splitting along conventional left-right lines. For instance, the country has been "living beyond its means" for years, according to Merz, a fiscal hawk by instinct despite his debt brake, and the finance ministry has warned of a 172 billion hole in its spending plans for the remainder of the decade. Merz is attempting to set the stage for significant changes to the welfare state and pensions, which make up one of the highest percentages in Europe at 31 percent of GDP. However, the chancellor's recent major speech on the topic was publicly dismissed as "bullsht" by Barbel Bas, his SPD (social democrat) labor and social affairs minister. It is not very auspicious.

What else is wrong?

Whether the spending reforms that have already been passed will lead to strong growth is still up for debate. Spending on defense is unlikely to have a significant long-term impact. Spending on infrastructure has a larger multiplier effect, but the 500 billion package is not as large as it seems because it is spread over 12 years, and according to the German press, some of the money intended for infrastructure is actually being diverted to pay for daily expenses. The ability of the state to allocate funds quickly or to projects that increase productivity is questioned. Merz's "autumn of reforms" has also fallen short, with only minor adjustments being made to welfare benefits.

What does the German economy look like in the long run?

That the entire decade has seen a stagnant economy. The nation has faced numerous geopolitical challenges, such as the conflict between Russia and Ukraine, the rise in energy prices, fierce competition from China in Germany's traditional manufacturing industries, such as automobiles, where China is the leader in electric vehicles, and trade disputes between Donald Trump and China. The export-led model that supported Germany's prosperity has been undermined by all of these; manufacturing still makes up one-fifth of the nation's gross value added. "Many of Germany's economic core strengths have turned into vulnerabilities," according to Marcus Berret of Munich-based consulting firm Roland Berger, and industrial production is no higher than it was in 2005. These include a "mighty vehicle industry having to write off 140 years of internal combustion-engine expertise, a large industrial base that is hard to decarbonize, and a high dependence on exports at a time when globalization is under threat." In the meantime, Germany's digital and technology industries continue to lag behind. However, just like its predecessors, the government does not appear to be addressing these problems.

Friedrich Merz might be able to grasp it.

The majority of analysts predict growth to be a meager 0.2 percent this year after declining for the previous two years. 2026 is expected to see stronger growth, although forecasts have grown more negative. Merz's own advisory team reduced their 2026 growth projection to less than 1% last week. The confidence of businesses has declined, and the unemployment rate has increased to nearly three million, the highest level in fourteen years. The Economist caused a stir in Berlin a few years ago when it called Germany the new "sick man of Europe," claiming that the country's long-standing success in established industries covered up its lack of investment in new ones. Public investment in digital technologies as a percentage of GDP is appallingly lowless than half that of the US or Francedue to an obsession with fiscal prudence. Germany is unprepared for the future due to its aging population and 70% reliance on imported energy. Based on the evidence from his first six months, it seems highly unlikely that Merz will be the man to turn things around.