Germany is currently facing its worst economic nightmare, reminiscent of the challenges faced by France. Friedrich Merz, the newly elected chancellor-in-waiting, has a daunting task ahead. With the economy faltering, there is an urgent need to allocate huge sums of money towards reviving the economy, pensions, and defense.
As the leader of the conservative CDU, Merz will be under immense pressure to reconsider Germany's stringent public spending and debt rules. These rules are deeply embedded in the national psyche due to the hyperinflation experienced during the 1920s Weimar Germany, which devastated savings and devalued the currency, eventually contributing to the rise of Hitler.
In recent history, Germany's fiscal discipline has been a tool used to critique its EU allies. During the eurozone crisis, German politicians criticized countries like Greece, Italy, and Spain for irresponsible spending. Berlin's insistence on strict EU-wide limits on budget deficits and public debt played a crucial role in shaping the eurozone-bailout programs.
Once the richest economy in the EU and the envy of Europe, Germany's economic glory days seem to be over. With the economy shrinking for the second consecutive year in 2024, inflation reaching a fifty-year high, and soaring energy prices, the situation is dire. The cutoff of cheap Russian gas following Putin's invasion of Ukraine has significantly affected German industry, leading to a decline in production and exports.
Sales to China have decreased, and the threat of US tariffs imposed by Donald Trump looms large. The need for infrastructure and business modernization is urgent in a country where outdated technology, like the fax machine, persists.
The aging population adds another layer of complexity. The retirement of baby boomers born during the high birth rates between 1955 and 1969 is shrinking the workforce, creating a looming pensions crisis. Reforming a system tied to wage inflation is a politically sensitive issue, especially with older, influential voters.
In 2023, a third of government spending, approximately £105 billion, was allocated to pensions. This figure is expected to nearly double by 2050. Simultaneously, Germany must increase its defense spending to counter the Russian threat and meet US demands, a request unlikely to be ignored by Donald Trump.
Last year, Germany recorded a trade surplus of over £59 billion with the US, its largest trading partner, accounting for more than 10% of its exports. Olaf Scholz, the outgoing chancellor, had announced €100 billion (£83 billion) to revamp the German Army after the Ukraine invasion. However, progress has been slow, and inflation has eroded the fund.
Scholz's SPD suffered their worst post-war election result, promising only to meet the minimum NATO defense spending target of 2% of GDP.
France is grappling with its second government in under three months, reflecting the fragmented and polarized state of French politics. Concerns about immigration and security, heightened by terrorist attacks in both France and Germany, persist among voters.
Marine Le Pen's eurosceptic hard-right National Rally remains the largest party in the French parliament, with Le Pen poised for another presidential run in 2027, when Macron cannot stand.
In Germany, the AfD almost doubled its vote share, becoming the main opposition party with their best results since Hitler. The AfD is ready to seize any opportunity if a Merz coalition stumbles over the numerous hurdles it faces. The potential of eurosceptic leaders in both Paris and Berlin in the coming years is a source of concern for EU officials in Brussels.
