Entry 06: Why the German Government's Direction Matters for Europe
The recent German election and the failure of the Christian Democrat (CDU) leader to get the 316 votes required to be anointed Chancellor, holds significant implications for the European Union (EU) and global politics.
As the largest economy in the EU, Germany's political and economic direction will shape the future of the bloc, influencing European integration, defence policies and EU Green Deal economic initiatives. Coming at a moment when global economics and trade are being rapidly reorganised, the stakes for the future of the EU are high and decisions taken in Germany will be the most influential to the block for the next decade.
Friedrich Merz's leadership of the CDU has been marked by controversy and division
Economic Significance
Germany's economy, with a GDP of €4.305 trillion in 2024, is the powerhouse of the EU. A robust German economy is essential for driving EU integration and economic growth. Germany's leadership in developing cohesive defence and economic policies is crucial, especially in the context of global economic shifts and the EU's strategic positioning.
Current Challenges Germany faces
The structural and economic challenges in Germany are the same which are facing all western economies
· High Energy Costs: The industrial sector is grappling with elevated energy prices, impacting production and competitiveness. Germany is the EU company most impacted by the Russia and Ukraine war, replacing and reconfiguring energy supplies has not been easy, and it will only be 2028 when the EU block is fully non reliant on any form of Russian energy.
· Outdated Technology: Many industries struggle with outdated technology, making it difficult to compete globally. Germany and the EU has failed over thirty years to develop a technology sector that is independent of or can compete and match that of the US and Silicon Valley.
· Rising Inflation: Inflation reached 2.25% in March 2025, driven by food price increases, supply chain challenges and contraction of global trade flows.
· Rising Inequality and Poverty: Increasing inequality is straining social services and causing unrest, high cost of housing and disenfranchisement of the under thirty years of age generation.
· Crumbling Infrastructure: Significant investments are needed to modernize infrastructure, in roads, public transport, health and social infrastructure.
· Competition from China: German industries face stiff competition from China, affecting market share and profitability. While China is now mounting a charm offensive in Europe and with other partners, there is a clear geopolitical opportunity for Europe to gain from the US withdrawal from the global markets and trade. Again, this is only possible with a strong Germany.
· Debt-Financed Spending: Proposed debt-financed spending for defence and infrastructure raises concerns about long-term financial stability. Germany has always been a country of strong local and regional savings banks, and mindset of frugality shaped by the post war era, and for the best part of the last sixty years this was a key to economic growth. Changing this mindset or taking on debt are simply an anathema to German political thinking.
EU Dynamics
At a time when the EU is benefitting from Trumps Tariffs and isolationist economic policy, there is opportunity for the EU to open new engagement with China and other global trading partners. There are also opportunities within the capital markets for the EU to step into the vacuum left by Trump, for the EU to be a trusted market and trade partner which is a position the US has held for the last eighty years. To do this the EU needs to be united under one political, social and economic contract.
Leadership Challenges
Friedrich Merz's leadership of the CDU has been marked by controversy and division. Despite his attempts to secure the chancellorship, his approach has often alienated key demographics. His traditionalist conservative stance, particularly on migration, has sparked significant debate.
Divisive and controversial
His approach has been divisive, including a controversial migration crackdown involving far-right nationalists’ themes to placate that side of the political debate. This is underpinned by his traditionalist conservative political theory of 'Leitkultur'. Merz's inability to bridge the economic divide between East and West Germany has further complicated his political journey.
Lack of retail political offering
Ultimately Mertz and CDR are facing the same challenges of traditional parties across western democracies. While the public and the middle classes have been losing their wealth and purchasing power, wealth and are calling for more social programs, the political leadership of the CDU have failed to triangulate the centre and cobble together a coherent political retail offering.
Mertz failures mirror the collapse of Starmer and the left in the UK
This is exactly the challenge which the Labour party in the UK have been facing. The failure of the Starmer government to develop a retail offering saw them getting wiped out by the Reform party in the mayoral and local elections in May 2025.
Political Landscape
The rise of the far-right Alternative für Deutschland (AfD) poses a significant challenge to Merz's CDU-led bloc. The AfD's growing influence underscores the need for the EU to address political groups supported by external disinformation from techno populists such as the Maga supporting Musk and the Russian secret service.
Economic Policies
Merz's economic policies include significant debt-financed spending for defence and infrastructure. However, his sudden policy shifts have caused concern. Balancing Germany's traditional debt brake with the need for economic stimulation in key sectors remains a critical challenge.
Summary
Merz's low approval ratings and divisive leadership style further complicate efforts to build a cohesive coalition within Germany and across Europe. Regardless of his technocratic tendencies and tin eared approach to the political criticism, a political settlement in German politics is key for the future of the EU.
