Germany’s centre-right wins: what does it mean for the economy?

The election results in Germany largely confirmed expectations, paving the way for a stable majority in Berlin. The Christian Social Alliance led by Friedrich Merz is the party with the largest share of votes, at around 28.5%. Nonetheless, this electoral performance is the second-worst in its history, surpassed only by its disastrous 2021 result.

For outgoing Chancellor Olaf Scholz’s Social Democrats, it was a historical defeat: at 16.4%, it is their worst electoral showing since 1887. The parties that governed alongside Scholz—the Greens and the Liberals—also lost support: having triggered early elections, they were punished with their worst-ever result (4.2%), leaving them out of parliament entirely.

Benefitting from the centrist hemorrhage were the more extreme wings of the political spectrum, most notably the far-right Alternative für Deutschland (AfD), which more than doubled its share of the vote, settling at 20.8%. AfD, which earns most of its support in the eastern regions of Germany—where it is by far the leading political force—achieved a historic result, doubling its tally of votes. In any case, the figure aligns with what had been predicted in recent polls; the momentum sparked by Donald Trump’s election and MAGA endorsements did not shift the outcome significantly.

At the other end of the spectrum, Die Linke (the Left) returns to the Bundestag, taking 8% of the vote.

In an election viewed as a critical turning point in German political history—evidenced by the record voter turnout in unified Germany (82.4%)—the polarization of the electorate is clear. Nevertheless, the centripetal force underpinning the German and European political framework, supported by a proportional electoral system and voting threshold, held firm. The CDU and SPD gained enough votes to form a grand coalition without third-party support, the most likely outcome in light of the upcoming consultations.
While the drift of votes toward alternative and Eurosceptic forces remains significant, the parties that have alternated in power for the past 70 years in Germany have been given another chance. The coalition that Merz will form is expected to make a decisive shift to avoid squandering this opportunity.

Angela Merkel’s influence on the elections

Only four years ago, Angela Merkel stepped down as chancellor, after dominating Europe’s political and economic arena for four terms and cementing Germany’s role as the continent’s economic and political locomotive. Today, German leadership appears tarnished, and the debate over Merkel’s legacy has been central to the electoral discussion. In 2024, Germany was the slowest-growing major economy in Europe, with several of its historically strong industrial sectors increasingly struggling under the pressures of globalization.

Over the past 20 years, Germany built its success by riding the wave of globalization, buying cheap gas from Russia and selling its cars in China and domestically. Embracing a monetary-oriented policy, Berlin supported the euro’s value and gained a competitive edge over countries with lesser fiscal capacity within the monetary union. At the same time, a more favorable exchange rate for the single currency compared to the old Deutsche Mark helped boost exports.

Today, Russia is invading a neighbouring country and gas prices are on the rise; China is facing a demand crisis and importing fewer German products; the United States is threatening tariffs of over 25% on EU imports; and Europe, whose Commission has been led by a CDU member for two consecutive terms, ranks last in global investment and risks missing the innovation train.

Key issues in the election campaign

During the campaign, many of Merkel’s policy choices—made in coalition with the Social Democrats—were scrutinized, with future Chancellor Merz among the critics. Energy policy is a prime example. Merkel’s government phased out nuclear power, a decision that made the country more reliant on gas and coal. Berlin depended on low-cost Russian gas delivered directly via the Nord Stream pipeline and was collaborating with Russia to open Nord Stream 2. After the invasion of Ukraine, that project was shelved, and energy prices soared, peaking with a 43% increase in October 2022.

Another controversial pillar from the Merkel era is the so-called “debt brake” (Schuldenbremse). Merkel’s government enshrined it in the constitution, turning the political choice to maintain very low deficits into a fundamental rule of the state. This helped Germany keep its debt-to-GDP ratio among the lowest of the major EU states.

However, critics—including, this time, the Social Democrats and the Greens—argue that it led to underinvestment in infrastructure, contributing to the loss of competitiveness among German companies and to stagnation. Other hallmark policies from Merkel’s tenure that came under fire include immigration policies—which stoked social tensions leveraged by the far right to build electoral support—and energy transition strategies, which put the auto industry at a disadvantage.

Economic recovery

In a campaign that sometimes resembled a retrospective on Merkel’s legacy, Merz set out to dismantle much of what she left behind and reposition the CDU to the right. His entire political project was born as a reaction to “Merkelism,” and one could say the same for the other party that gained significant ground in these elections (the AfD). The future chancellor represents the CDU’s more traditionally conservative wing. In economic matters, Merz’s political reference is Ronald Reagan. In fact, Merz’s platform does not seem far removed from what brought conservatives to power in the United States: tax cuts, deregulation, and lighter bureaucracy to revive the economy.

The new leadership will be called upon to walk a tightrope in restoring Germany’s centrality, demonstrating an ability to reconcile its ideological posture with practical governance. It must strike a delicate balance between the need to invest and the preference for fiscal discipline, between conservative political affinities and the need to decouple from the United States, between centrist pragmatism and right-wing impulses, and between domestic interests and bolstering the EU.

Reviving the economy will be the first challenge. Germany’s strict, self-imposed fiscal rules certainly do not make the government’s task easier. After the Constitutional Court struck down a budget plan in 2024, the fiscal puzzle remains complex: raise taxes, cut spending, or revise the fiscal rules. Merz has ruled out new taxes, and his CDU champions controlled public spending as a core principle, but the SPD—likely the coalition partner—may push back against overly severe austerity measures. A compromise could be found by creating exceptions for “targeted debt,” such as a special fund for the military or climate investments.

Modernizing infrastructure (roads, railways, broadband) will be another priority, as will supporting key sectors (like automotive and chemicals). Merz’s approach suggests he will advocate for tax incentives and reduced bureaucracy to stimulate investments. The challenge will be to do so without slashing public services or alienating the SPD, which will likely veto any rollback of the social policies introduced in the last parliamentary term.

Climate and Energy Transition

Even if the Greens remain outside the government, climate goals won’t vanish from the agenda. The issue will be how to continue decarbonization, and it seems likely the new government will opt for a less interventionist approach, emphasizing market incentives for green technology and innovation over bans or binding regulations. However, it will still be necessary to ensure energy security by continuing to build LNG terminals, investing in renewable energy projects, and possibly keeping some coal plants operational until sufficient alternatives are in place.

Germany’s European and Global Role

The new leadership also faces the difficult task of reinvigorating the European project, which many view as confronting a near-existential threat. Merz has declared that unifying Europe will be a prime objective. An immediate test is maintaining EU unity on support for Ukraine and sanctions against Russia. Trump’s push for a rapid ceasefire directly negotiated with Putin places Europe in a tough spot. Merz has criticized this approach, but actions will need to match the rhetoric. Germany may have to step up its role as a guarantor of European security, potentially speeding up the defense buildup already initiated by Scholz. The Merz-led coalition is expected to invest in rearmament, potentially reaching or surpassing NATO’s 2% of GDP target, yet another major expenditure that jars with a strict budget stance.

At the EU level, the new German government must tackle several unresolved matters, including reform of the Stability and Growth Pact. Germany has typically taken a cautious stance on shared debt within the EU, a position it is likely to maintain. Merkel agreed to a one-time EU recovery fund in 2020, but a Merz government might resist making this form of debt mutualization permanent. Just as in domestic policy, Berlin might allow certain exceptions—such as enhanced European military cooperation or coordinated industrial policies (chips, green technologies)—to reduce dependence on the US or China.

Another looming challenge is reinvigorating relations between the US and Germany. Merz, who leans pro-American politically, faces an ambiguous partner. The future chancellor has already stated that Germany will not hesitate to disagree with Washington if necessary. Should Trump introduce the promised tariffs or take a harder line on China—an essential trading partner for Berlin—the new government will have to maneuver carefully if it wants to preserve global market access for German goods. Merz’s political affinity with US Republicans could, however, help secure an agreement and avert the personal clashes Merkel experienced with Trump.

The list of challenges is, in fact, quite extensive, but it also offers important opportunities. If Merz’s political project proves ineffective, it could increase uncertainty about Germany’s political direction and its ability to maintain leadership in Europe. Merkel’s departure left a leadership vacuum on the international stage, which Scholz attempted to fill with less assertiveness. Merz will have to establish his international standing from the outset in a global arena rife with challenges, where there is increasingly little room for hesitation.