Germany: a change of direction?

With a new German chancellor in place, there is optimism that the difficult time for the German economy can come to an end.

GDP growth was marginally negative in 2024 (-0.2%) and the IMF forecasts a similar outcome in 2025 (-0.1%). But growth has been weak for some time. In the final quarter of 2024, the level of GDP was no higher than five years earlier. The nineteen other countries in the eurozone outpaced Germany, growing by 5%. In some of the small eurozone economies growth was very strong indeed. 25% in Ireland, for example.

One broad structural issue hampers Germany. Its industrial structure is no longer the envy of the world. The auto sector is struggling to compete in the rapidly evolving EV market, not least because of intense Chinese competition.Reliance on Russian gas imports and the closing of Germany’s nuclear power capability look misguided in a world riven with geopolitical tensions and seeking energy security.

But Germany’s famous fiscal rectitude is now being eased. Christian Linder, the finance minister from the (liberal) FDP element of the former coalition government, commented that “I’d rather do the right thing [stay fiscally restrictive] and lose my job than do the wrong thing and get re-elected.” He lost his job.

It may be that Friedrich Merz, from the right-leaning Christian Democratic Union, steers a new pro-business direction. He is famously in favour of tax simplificaton , saying that Germany’s notoriously complex tax return forms should be cut down so they fit on a beer mat. He has criticised Angela Merkel’s allowance of mass immigration and closure of nuclear power plants. These aspects of his policies may well resonate with those of President Trump.

The new finance minister, Lars Klingbeil, has the delicate task of overseeing a big increase in defence and infrastructure spending while not being seen to discard Germany’s fiscal responsibility.