Germany: German economy to remain frail regardless of election result
CDU to retake the Chancellorship: On 23 February, Germany heads to its first snap federal elections in nearly 20 years. The vote was brought forward seven months after the government collapsed in late 2024: In November, Chancellor Olaf Scholz fired his finance minister—whose party promptly left the ruling coalition—over mounting budget disagreements and, in December, the government lost a vote of confidence in the Bundestag.
Currently leading the polls is the center-right CDU/CSU, an alliance between the Christian Democratic Union and its Bavarian sister party the Christian Social Union. The far-right Alternative for Germany (AfD) has risen to second in polls, closely trailed by Chancellor Scholz’s Social Democratic Party (SPD) and the Greens. The CDU/CSU are best placed to form a coalition, requiring only one additional large party to reach a majority. A CDU/CSU-SPD coalition is the most likely outcome, though an alliance with the Greens cannot be ruled out.
Policy differences cloud the reform outlook: The CDU/CSU are campaigning on a pro-business platform, pledging to reduce income taxes and employee contributions, cap corporate taxes at 25% and abolish the solidarity levy on high-income earners. In addition, they propose lowering electricity prices, relaxing green regulations on companies and reconsidering the reintroduction of nuclear power to stimulate a sluggish industrial sector. The CDU/CSU plans to fund these measures through welfare cuts and a more strict immigration system, thus preserving the constitutional debt break that tops the state’s net borrowing at 0.35% of GDP annually; the latter was a trigger point for the last government’s collapse, as the SPD sought to circumvent it to plug a budget shortfall.
Still, a coalition with the SPD or the Greens will likely force CDU/CSU to drop some reforms. Both the SPD and Greens call for greater state intervention and aid to low-income households. The SPD would likely attempt to cut VAT on essential goods and raise income taxes on wealthier households; the Greens advocate for a billionaire tax to fund green transition subsidies; and both wish to lift the minimum wage to around EUR 15 per hour from close to EUR 13. Moreover, both call for reforms to the debt break, and are firmly committed to the country’s decarbonization targets. Meanwhile, the SPD proposes a EUR 100 billion infrastructure investment fund and a 10% tax refund on investment in equipment to support the industrial sector.
All three parties have ruled out partnering with the AfD, which is thus unlikely to secure a position in the government. That said, its growing voter base has driven the CDU/CSU to harden their stance on immigration, committing to stop illegal migration, tightening citizenship rules and accelerating the deportation of convicted migrants. In addition, the alliance plans to process asylum applications in third countries, a measure that both the SPD and the Greens oppose.
Economic outlook remains dimmed: Regardless of the outcome, our panelists are downbeat on Germany’s economic prospects, having cut their 2025 growth forecasts by 0.8 percentage points from a year ago. An ailing industrial sector should continue to knock activity, with GDP expected to expand only weakly after shrinking for two consecutive years. In addition, policy changes are likely to be slow, given the clashing economic agendas between the CDU/CSU and the other two potential partners. Moreover, structural challenges—including weak demographics and lackluster public investment—will continue to cloud the outlook.
Panelist insight: On the political outcome, EIU analysts said:
“Germany’s early election in February will result in a change of government, from the centre-left to the centre-right, but the need for a coalition partner will limit policy changes, and the main impact will be a power vacuum in early 2025. […] The economy will record minimal growth in 2025, after five years of stagnation. Germany is the country in Europe most exposed to new US import tariffs, and faces unresolved structural problems, from high energy costs to rising Chinese competition.”
ING’s Carsten Brzeski commented on the economic outlook:
“It is becoming increasingly clear that even in a best-case scenario with reforms and investments, any new government will not try to overhaul the old economic business model, but rather try to rejuvenate the old one […]. However, a closer look at the proposals shows that they are often rather superficial and that the financing of the ideas is anything but solid.”