Germany holds a snap election on Sunday and the current coalition government of Social Democrats (SPD), Greens and the Free Democrats (FDP) is heading for a heavy defeat. The main opposition conservative Christian Democrat-Christian Social Union alliance is polling about 30% in voting intentions, while the SPD is down to 16% (from 26% last time) and the Greens at 13% (from 15%), with the FDP likely unable to muster even the 5% share required to get seats in the Bundestag (parliament).
However, the CDU-CSU share of the vote is well down from its usual 35-40% that it gets in elections. That’s because the anti-immigrant, anti-EU, racist Alternative for Deutschland (AfD) party has doubled its previous electoral support in the opinion polls to 20%. There are now two left parties – the traditional Die Linke, mainly supported in the old eastern Germany and the breakaway Bündnis Sahra Wagenknecht (BSW), named after its leader. The latter gained a sizeable share of votes in recent state (Lander) elections, but has since faded in the polls and seems unlikely to get federal parliament seats in this election; Der Linke could just sneak in.
CDU leader Friedrich Merz will probably become chancellor with his alliance taking the largest number of seats, but with not a majority. So he will need at least one coalition partner. The CDU has said it will maintain the Brandmauer – firewall – policy of not going into alliance with the AfD. So he will look to bring in the Greens, or have a “grand coalition” with the Social Democrats.
The new government faces a major challenge because Germany’s economy is tanking. The economy shrank in 2023 and again in 2024; it seems likely to stay in recession again this year. It adds up to the longest period of economic stagnation since the fall of Hitler in 1945.
The great manufacturing powerhouse of Europe, Germany, has ground to a halt since the pandemic. German real GDP has stagnated for the last five years. Real business investment in Germany is severely depressed, more so than in the Eurozone overall. Real household consumption in Germany has been hammered.
The German government has followed slavishly the policies of the Western NATO alliance and ended its reliance on cheap energy from Russia – it even went along with the blowing-up of the vital Nordstream gas pipeline. As a result, energy costs have rocketed for German households.
But more important for German capital are the rising energy costs for manufacturers. The power has gone out of the economy. Cheap fossil fuel imported from Russia has gone as part of the sanctions and the break with Russia over the Ukraine war. It has been replaced by expensive LNG from America, so that electricity costs have rocketed. The German Chamber of Industry and Commerce (DIHK) commented: “The high energy prices also affect companies’ investment activities and thus their ability to innovate. More than a third of industrial companies say that they are currently able to invest less in core operational processes due to the high energy prices.”
Energy intensive sector production (indexed)
Achim Dercks (DIHK). “If companies themselves no longer invest in their core processes, this will amount to a gradual dismantling.” As a result, manufacturing output and capacity has plummeted.
The profitability revival for German capital from the beginning of the euro and the relocation of industrial capacity into the east of the EU and low wages for a large part of the labour force is over. Profitability began to fall in the Great Recession and through the Long Depression of the 2010s. The biggest drop came in the pandemic and profitability is now at an historic low.
Worse, the mass of profits has also started to fall as the rising costs of production (energy, transport, components) eat into revenues. Real gross capital formation (a proxy for investment) is contracting.
German corporate bankruptcies have jumped 2,000, the highest in ten years. That’s a doubling in the last three years reaching 4215 at the end of 2024.
Real wages in Germany remain below pre-pandemic levels. A quarter of Germans have incomes that are insufficient to make ends meet, according to the German Economic Institute in its”Distribution Report 2024″ citing household survey data.
No wonder consumer spending has fallen off a cliff.
It’s just a matter of months until the number of unemployed people in Germany hits 3 million for the first time in a decade, as companies either go bankrupt or give up waiting for a turnaround that just refuses to arrive. After a wave of plant closures in energy-intensive industries such as chemicals in 2022, the key automotive sector succumbed last year, with Volkswagen and others announcing thousands of job cuts. The jobless rate is now at its highest level in more than four years, only just below where it peaked during the pandemic. Klaus Wohlrabe, Ifo’s head of surveys, said he expects the jobless rolls to hit the 3-million mark by the middle of the year.
The demise of the German economy has exposed the underlying issue of a ‘dual labour’ market with a whole layer of part-time temporary employees for German businesses on very low wages. About one-quarter of the German workforce now receive a ‘low income’ wage, using a common definition of one that is less than two-thirds of the median, which is a higher proportion than in all 17 European countries, except Lithuania. This cheap labour, concentrated in the eastern part of Germany, is in direct competition with the huge numbers of refugees arriving in the last two years. So many voters in eastern Germany think that their problems are due to immigration, providing traction for the AfD. But while immigration does come out on top in voters’ most important issues, the economic situation, energy, and inflation also get a combined 58%.
CDU leader Friedrich Merz’s solution to this crisis are the usual neo-liberal policies: reductions in government spending (benefit cuts) and ending business ‘red tape’. Under the SPD coalition there were heavy social spending cuts in order to pay for more military purchases, ‘Project Ukraine’ and rising energy costs. Ironically, Merz says there must still be room to raise defence spending – Merz even mooted that Germany should get nuclear weapons.
Merz promises that his government will right the ship by attracting more private investment in the economy. Meanwhile, Germany’s infrastructure spending on rail, bridges etc is at an all-time low. Germany’s reputation for efficiency no longer holds true, critics contend — trains do not run on time, internet and mobile phone coverage is often patchy, and roads and bridges are in a state of disrepair. Elsewhere there are concerns about the state of the country’s bridges — in a 2022 paper, the transport ministry identified 4,000 of them in need of modernisation. Just 11 percent of Germany’s fixed broadband connections are of the faster fiber-optic variety, one of the lowest rates among countries in the OECD.
Germany’s failure to increase public sector investment is partly down to the so-called “debt brake”, a constitutional limit on government spending. Agreed in 2009, this requires that the country’s budget deficit does not exceed 0.35% of structural GDP. This rule has reduced the government’s ability to invest. However, the German constitutional court would most likely want to put a limit on any attempts to end the rule and so even if modifications to the debt brake do pass judicial review, they would likely be too small to materially expand Germany’s fiscal space. Moreover, two out of three CDU/CSU and three-quarters of AfD voters oppose any easing of the debt brake. Indeed, the SPD-led coalition fell precisely because the FDP finance minister refused to consider more borrowing and demanded tax and spending cuts.
The AfD claims the answer to Germany’s demise is to end immigration, leave the euro altogether and reduce its payments to the EU. The EU’s €115bn (£95.60) contributions to Ukrainian defence are only exceeded by the US’s €119bn. The BSW wants an end to support for Ukraine and an end to sanctions against Russia.
What all this shows is that even German capitalism, the most successful advanced capitalist economy in Europe, cannot escape the divisive forces of the Long Depression. But it also shows that the German coalition government’s slavish following of the interests of US imperialism in the name of ‘Western democracy’ over Ukraine and Israel has destroyed the hegemony of German capital in Europe and the living standards of its poorest citizens. No wonder the voices of nationalism and reaction have gained traction. The irony now is that the Trump administration seems intent on reaching a peace deal with Russia over the heads of European leaders.
German capitalism may have been a success story over the years since reunification with East Germany. But its long-term prospects do not look so good from hereon. It has a declining and aging workforce and fewer areas for exploitation of new labour outside Germany, while competition from China and Asia will mount. And Merz will have to get ready for Trump’s tariff increases on German exports to the US.
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