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The German economy in difficulties has been an important issue of conversation among the critics of the government of Foreign Minister Olaf Scholz during the last electoral campaign, but analysts warn that a new leadership might not change these tides.
While voters prepare to go to the polls, it is now almost certain that Germany will soon have a new chancellor. Friedrich Merz of the Christian Democratic Union is the firm favorite.
Merz has not shunned Scholz’s economic policies and linking them to the dull state of the largest economy in Europe. He argues that a government under his leadership would give the economy the impulse he needs.
The experts who talked to CNBC were less safe.
“There is a high risk that Germany obtains an economic model renewed after the elections, but not a new model that makes the competition jealous,” said Carsten Brzeski, head of Macro Global of ING, to CNBC.
The CDU/CSU Economic Agenda
The CDU, which at a federal level is related to the Regional Brother Party of the Christian Social Union, is running in a “typical economic conservative program,” said Brzeski.
It includes corporate income and tax cuts, less subsidies and less bureaucracy, changes in social benefits, deregulation, support for innovation, new companies and artificial intelligence and impulse investment among other policies, according to CDU/CSU activists.
“The weak parts of positions are that the CDU/CSU is not very precise about how it wants to increase investments in infrastructure, digitalization and education. The intention is there, but the details are not,” said Brzeski, pointing out that the union seems to be with the aim of reliving Germany’s economic model without reviewing it.
“It is still a reform program that pretends that change can happen without pain,” he said.
Geraldine Dany-Knedlik, prognostic head of the DIW Berlin Research Institute, said the CDU is also looking to achieve gross growth in the domestic product of around 2% again through its fiscal and economic program called “Agenda 2030”.
But reaching such levels of economic expansion in Germany “seems unrealistic”, not only temporarily, but also in the long term, he told CNBC.
Germany’s GDP decreased both in 2023 and 2024. Recent quarterly growth readings have also been staggering on the edge of a technical recession, which until now has been avoided by little. The German economy was reduced by 0.2% in the fourth quarter, compared to the previous three months, according to the last reading.
The largest economy in Europe faces pressure in key industries such as the automotive sector, infrastructure problems such as the country’s rail network and a housing construction crisis.
Dany-Knedlik also marked the so-called debt brake, a long-standing fiscal rule that is enshrined in the German Constitution, which limits the size of the structural budget deficit and how much debt the government can assume.
If the clause must be reviewed or has not been a large part of the fiscal debate before the elections. While the CDU ideally does not want to change the debt brake, Merz has said that it can be open to some reform.
“Increasing growth prospects substantially without increasing debt also seems quite unlikely,” said Dany-Knedlik of DIW, adding that, if public investments increased within the debt brake limits, significant tax increases would be inevitable .
“Taking into account that a 2 percent growth objective will be achieved within a 4 -year legislation period, the 2030 Agenda in combination with the attitude of conservatives towards the breakdown of debt for me reads more a list of desires than a direct economic growth program. ” She said.
Franziskka Palmas, a senior economist of Europe in Capital Economics, sees some benefits for the plans of the CDU-CSU Union, saying that they would probably be positive “for the economy, but warns that the resulting impulse would be small.
“Tax cuts would support consumer spending and private investment, but weak feeling means that consumers can save a significant participation of their additional income after taxes and companies can be reluctant to invest,” he told CNBC.
However, Palmas said that not everyone would come to a winner of the new policies. Rental tax cuts would benefit households with average and higher income more than those with a lower income, which would also be affected by possible social benefits reductions.
Coalition speaks ahead
After Sunday’s elections, the CDU/CSU will surely be allowed to find a coalition partner to form a majority government, with the Social Democratic Party or the Green Party emerging as the most likely candidates.
The parties must negotiate a coalition agreement that describes its joint objectives, even in the economy, which could be a difficult company, said Palmas de Capital Economics.
“The CDU and the SPD and the greens have significantly different economic policy positions,” he said, pointing out discrepancies on taxes and regulation. While the CDU/CSU wants to reduce both elements, the SPD and the greens seek to increase taxes and oppose deregulation in at least some areas, Palmas explained.
However, the group is likely to have power in any possible negotiation, since it will probably have its choice between associating with the SPD or the Greens.
“Consequently, we suspect that the coalition agreement will include most of the main economic proposals of CDU,” he said.
