Last March, following angst-ridden months as Europe came to terms with Donald Trump’s return to the White House, financial markets in Paris, Milan and Berlin were gripped by a surge of optimism. The cause was a historic deal brokered by Friedrich Merz, then Germany’s chancellor-elect, which loosened constitutional spending constraints in the EU’s powerhouse nation. Here at last, it was hoped, was the fiscal kickstart required to end a prolonged period of economic stagnation, and mitigate geopolitical headwinds blowing from the US and China.
Six months into Mr Merz’s premiership, the angst is back and there are the first murmurings of rebellion. The chancellor’s plan included “whatever it takes” levels of defence spending, designed to prepare Germany for a changed era in which the US was no longer a dependable ally, and a huge €500bn investment in infrastructure and the green transition. But last week, the chancellor’s team of economic advisers downgraded growth forecasts for 2026 to below 1%. And ahead of what would constitute a fourth year of near-flatlining, business confidence has slumped.
Lifting Germany’s “debt brake” was never going to be an instant panacea for longstanding problems. Patience will be required, for example, before the full impact of spending on the country’s ailing transport systems is felt. But across Europe, patience is a virtue that’s in short supply among voters, who feel that their living standards have been stagnating – or worse – since the crash of 2008. According to one recent survey, fewer than one in five Germans wish to see Mr Merz standing again at the next federal election.
As the far-right Alternative für Deutschland party tops the polls, such disillusionment is a problem not just for the chancellor and his centre-right-led coalition government, but for mainstream politics as a whole. Germany has found itself at the sharp end of a wider geopolitical storm: Russia’s war in Ukraine, aggressive Chinese competition and Mr Trump’s trade wars have all combined to undermine an export-led model that underpinned European prosperity. Mr Merz was right to recognise that the exceptional times required a bold and imaginative fiscal response. But as discontent grows, he is already under pressure from critics to rein in social spending in the hope of increasing the country’s competitiveness.
For a chancellor who once served on the supervisory board of Black Rock and forged a political reputation as a fiscal hawk, that would be a kind of reversion to type. Mr Merz’s Social Democratic coalition partners would attempt to see off a threatened revolt by Christian Democrat MPs over a proposed pensions package. But the siren calls from familiar quarters on the right should be resisted more generally.
For Germany – and for Europe as a whole – the imperatives of the age are to revive a battered and bruised social model, and to turbocharge investment as the global economy is shaped to suit a multipolar world. Falling back on the failed economic orthodoxies of a previous era would only be to further empower the far right, which began its gradual ascent during the austerity years that followed the crash.
Mr Merz has had a difficult first six months in office. But as the scale of the challenges facing Europe’s most important economy becomes ever clearer, Germany cannot afford to go back to the future.
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