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Can Germany's next government restore its competitiveness

Sunday’s elections will very likely result in a change of government, with CDU leader Friedrich Merz the probable incoming chancellor.

Author
Felix Feather
Felix Feather
Economist

Duration: 1 Min

Date: 20 Feb 2025

Key Takeaways

  •  Germany’s economic model is under pressure from multiple structural headwinds. 
  • The government formed following Sunday’s elections needs to deliver an economic strategy capable of confronting these headwinds.
  • Many of Germany’s structural challenges can be traced back to relatively slow capital deepening. Restoring competitiveness, then, will mean expanding capital expenditure in both the private and public sector. 
  • However, the government’s ability to invest is currently limited by the debt brake, a constitutional amendment restricting government deficit spending to 0.35% of GDP.
  • We think the next government will look to expand public sector investment, as well as increase defence spending, through limited debt brake reform. 
  •  In addition, the new government might look to boost the supply-side by restarting recently closed nuclear reactors.
  •  In all, structural headwinds are likely to continue to weigh on growth prospects. But potential growth expectations could be revised higher depending on the next government’s agenda. 

    Read the full article. 

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