News & insights

Based on:

Olters, Jan-Peter (2025). ‘Des changements dramatiques attendent le nouveau chancelier allemand’, Conseil des relations internationales de Montréal (CORIM), 5 May 2025; Des changements dramatiques attendent le nouveau chancelier allemand | Blogue CORIM

Podcast L’état du monde, Episode 34 (‘Conflit indo-pakistanais et défis politiques de l’Allemagne’), 12 May 2025; L’état du monde: le balado Épisode #34 

The change of government in Germany comes at a time of profound global upheaval. The Zeitenwende (turning point), announced by former Chancellor Olaf Scholz in response to Russia’s invasion of Ukraine in 2022, has long since become a fundamental shift in Germany’s economic and security policy. With Russia threatening to extend its expansionist ambitions towards the EU and a nationalistic, increasingly neo-imperialist US administration putting considerable strain on Western partnerships, Germany feels caught between a geopolitical rock and a budgetary hard place. In this emerging world order, increasingly shaped by power rather than rules, even long-standing alliances are being shaken. Territorial claims, including those against NATO members, and escalating trade conflicts are undermining confidence in established structures; Friedrich Merz, the then-designated new federal chancellor, called for gradual independence from the United States. More and more partners are questioning the strategic reliability of the Western order. This is forcing Europe to take greater responsibility for its own security and economic policies. To this end, during the political interregnum, Germany amended its constitution to enable the necessary fiscal responses.

A dual challenge

Against this backdrop, the German government under Chancellor Friedrich Merz has had to devise a new geofiscal strategy—a fiscal policy that reflects security realities without jeopardising social cohesion or fiscal stability. Therein lies the dilemma: the necessary investment in defence, infrastructure, and technology to secure Europe’s strategic sovereignty collides with a budgetary framework not designed for times of crisis. The Schuldenbremse (deficit ceiling)—once hailed as a hallmark of prudent fiscal policy—is increasingly proving to be an obstacle to effective governance. The failure to adequately address the tensions between investment, social spending, and fiscal discipline during the election campaign backfired during the coalition negotiations. The new government was faced with the dual task of designing a viable programme and regaining lost confidence.

There was only a short window of opportunity between legislative periods to reform the deficit ceiling—a step that both the International Monetary Fund and the Bundesbank had long said was necessary. This constitutional amendment was passed, but in direct contradiction to the Christian Democrats’ earlier election promises. In the new Bundestag, the far right and hard left together form a blocking minority against constitutional change. Still, the reform passed by the previous Bundestag is a political stigma for the new government—and will further undermine its already fragile credibility.

But what may seem politically controversial was factually necessary. Dogmatic adherence to rigid fiscal rules can undermine the capacity for democratic action—with far-reaching consequences for social stability, economic renewal, and, not least, the ability to respond to security escalations in Europe and the transatlantic alliance. The 2025 budget had already failed under the previous legislature, leading to the collapse of the coalition and early elections on 23 February.

Economic growth as key

Economic growth is not an end in itself, but a precondition for political action. Only higher real growth rates can create the fiscal space needed for geopolitically capable policymaking. If average real growth can be raised to two per cent a year, more than €40 billion of additional tax revenue could be generated annually—enough to almost finance in its entirety the €500 billion of Sondervermögen, the twelve-year special authorisation for additional public debt earmarked for infrastructure and climate. This will require efficiency gains and rigorous reforms.

But the road to sustainable growth is a difficult one. The German economy suffers from structural weaknesses ranging from excessive bureaucracy and an inefficient tax system to a chronically under-digitised public administration. As long as approval procedures take years and fail at federal interfaces, even massive investment programmes will remain largely ineffective. A coordinated, strategically focused modernisation policy is therefore essential.

Anchoring defence spending in the federal budget

Financing Germany’s security build-up is another test for the government—especially given the already fragile confidence in the sustainability of public finances. A clear fiscal separation is needed: defence spending must be anchored as a permanent responsibility in the regular federal budget and not managed through temporary special funds. An explicit exemption of this expenditure from the Schuldenbremse—above a threshold of one percentage point of GDP—would create the necessary flexibility and strengthen the implicit deterrent effect of security policy.

It is right that the Sondervermögen should be used exclusively for additional, non-military and climate-related investments. This ringfencing makes economic sense and increases fiscal transparency. Projects such as climate-resilient infrastructure, digital education, or the promotion of technology could not only boost overall economic productivity but also attract broader political support than a blanket relaxation of debt rules. The key is to ensure that the money is channelled into real, forward-looking investment—not consumer spending and/or priorities of partisan interest.

Think holistically, exploit synergies

Policy decisions in Germany are still too often taken in isolation. But there are opportunities for integrated solutions, especially at the intersection of social, fiscal, and defence policy. A reform of unemployment benefits and the labour market—e.g., by combining an increase in the minimum wage with tax cuts—could strengthen the welfare state, create incentives for employment, reduce social tensions, and break the reform deadlock. Security-related investments should also be considered also in terms of their impact on innovation, employment, and related tax revenues—and thus anchored in European value chains.

The new German government is doomed to succeed. Failure would not only have economic but also geopolitical consequences. A paralysed Europe is an open invitation to authoritarian powers. The threat is also growing domestically. The rise of far-right parties is a symptom of declining public confidence in the state’s ability to manage and resolve crises. Only a credible, decisive, and pragmatic economic policy can counter this trend.

The German elections were a wake-up call. People expect clarity—on policy priorities, how they will be financed, and the direction in which the country is heading. The political window for a bold but responsible fiscal policy shift is now open. But it will close quickly. The era of fair-weather politics is over.

Jan-Peter Olters