Germany needs a ‘game-changer’ government

The origin of the phrase “necessity is the mother of invention” is often attributed to the works of the ancient Greek philosopher Plato. However, it has assumed a much more modern relevance in 2025 for Germany.

Relatively few observers expected the incoming German chancellor, Friedrich Merz, leader of the right-of-center Christian Democratic Union/Christian Social Union bloc, to meet his pledge in February that he would finalize a coalition agreement with the left-of-center Social Democrats before Easter.

However, in the midst of much policy turbulence, he announced his new government on Wednesday, more than a week ahead of his deadline, and with a huge in-tray awaiting his attention.

In 2017, it took Angela Merkel more than 170 days to finally agree the previous “grand coalition” between the CDU/CSU and the Social Democrats, so the latest negotiations delivered a deal much more quickly.

The fact that Merz managed to form his coalition on time reflects not only his personal desire to assume power as quickly as possible; the need for expedient compromise was necessitated by a challenging external context, from the ongoing developments in Ukraine to the uncertainty over US President Donald Trump’s tariffs.

On the issue of Ukraine, Merz might be more helpful to Kyiv than his predecessor as chancellor, Olaf Scholz, who was hesitant to supply advanced weaponry that could be used to attack Russian territory. In contrast, Merz conditionally supports equipping Ukraine with longer-range Taurus missiles. This might prove important in the coming weeks, given the present European engagement with the Trump team in Washington over an eventual “end game” for Ukraine.

Outside of the foreign context, part of the reason for the sense of urgency from Merz has been the rise of the far-right Alternative for Germany party, or AfD, which received backing during the election campaign from the Trump team, including US Vice President J.D. Vance, and Tesla CEO Elon Musk, who has been heading Trump’s Department of Government Efficiency initiative.

There was a big turnout for the election in February, with 82.5 percent of eligible voters casting a ballot, the most since German reunification in 1990. The AfD finished a strong second, with about twice the number of votes it secured at the previous election, and the far-right party might not have lost its momentum just yet, especially if the issue of immigration becomes more politically salient.

The key test of Merz’s chancellorship on the domestic policy front will be his efforts to boost the German economy

Andrew Hammond

Merz will therefore be thinking about how best to attempt to halt the rise of the AfD. He has already pivoted to the political right on law and order, including a call for tougher immigration policies, including an accelerated process for deportation of noncitizens with criminal records, and efforts to reverse the flows of undocumented migrants.

At the same time the AfD surged to claim almost 21 percent of the vote in February, the CDU/CSU only managed to win 28.5 percent. This was its second-worst performance in the post-war era, after the 24.1 percent it received in 2021. To contextualize this, it was significantly less than the 42 percent share the bloc won in 2013 during Merkel’s chancellorship.

Immigration policy aside, the key test of Merz’s chancellorship on the domestic policy front will be his efforts to boost the German economy, which shrank for two consecutive years in 2023 and 2024, experiencing a double dose of stagnation for only the third time since the 1950s.

Merz champions a reformist policy platform called “Agenda 2030.” It was originally focused around efforts to rejuvenate growth through tax cuts but Merz hopes to trigger investment-led stimulus that can help make Germany a more attractive business destination.

Following the election, however, the big economic news in Germany was that legislators voted last month to dilute the 2009 constitutional balanced budget amendment (the so-called “debt brake”), a move that could free up more than €1 trillion ($1.1 trillion) for new German spending over the next decade on defense and infrastructure.

At least €100 billion will be spent on a green-transformation fund. Merz has pledged to scale back dependence on Russian gas, and renewables now produce 60 percent of German energy. He has also proposed a reduction of the tax burden on energy by at least 5 cents per kilowatt hour by lowering the electricity tax and grid fees; a lifting of the ban on combustion engines to strengthen Germany’s automobile industry; and an expansion of charging infrastructure for e-mobility.

While the new spending is surely affordable for Berlin, there is potential for significant political backlash, especially if inflation is reignited. The AfD opposes the new fiscal plans. Moreover, the Left Party has criticized them too, for different reasons, given the big German military build-up that is on the horizon.

Merz’s focus on Agenda 2030 is timely given the possibility of a tariff war with the US, despite Trump’s U-turn on Wednesday. Moreover, China is an increasingly prominent economic competitor, including in the production of electric vehicles.

Merz has previously warned German companies against any deepening of economic ties with China, including bigger investments in the country. He said: “If you take this risk, do it in such a way that it doesn’t endanger the entire company group if you have to write off this investment from one year to the next. Under no circumstances should you turn to the state, to the federal government of the Federal Republic of Germany, to help you economically in such a situation.”

His comments might signal a big change in policy. Following Russia’s invasion of Ukraine, Scholz’s coalition government began to implement a so-called “derisking” strategy as part of broader efforts to reset relations with Beijing. However, many large German firms have yet to fundamentally change their investment strategies in China.

Germany’s domestic and foreign policy state of flux therefore calls for a game-changer government. But it might not become clear for many months whether Merz can deliver on his goals.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.