German opposition parties and business groups yesterday called on Chancellor Olaf Scholz to quickly launch new elections to minimize political uncertainty after the collapse of his three-member coalition.
The government fell on Wednesday as years of tensions culminated in a row over how to fill a multibillion-dollar budget deficit and revive Europe's largest economy.
The chancellor has said he will hold a confidence vote in January, which he is likely to lose, triggering new elections by the end of March, six months earlier than planned.
Because of the crisis, Šolc gave up his trip to yesterday's European Union summit in Budapest and canceled his attendance at the next United Nations summit on climate change.
He said he fired Finance Minister Christian Lindner of the fiscally conservative Free Democrats (FDP) for obstructing the resolution of budget disputes. The final straw was his obstruction of Scholz's plan to ease borrowing limits to increase support for Ukraine in the 2025 budget by three billion euros, Reuters reported.
Lindner's removal saw the FDP leave the coalition, leaving Scholz's SPD and the Greens to run a minority government and rely on makeshift majorities to pass any significant measures in parliament.
The fall of the government will bring additional economic problems in the coming months and only a glimmer of hope for the ailing European economic giant if it leads to a less unstable government and more coherent policies, assesses Reuters.
The final straw was Lindner's obstruction of Scholz's plan to ease borrowing limits in order to increase support for Ukraine in the 2025 budget by three billion euros
Months of bickering in the coalition further undermined confidence in an economy struggling with high energy costs and weakening competitiveness. Its collapse occurred at a critical moment for the German economy, just a few hours after Donald Trump won the US presidential election, which increased the possibility of a trade war with Germany's main partner in that area, the British agency writes.
Germany's economy has lagged behind the European Union average since 2021 and is expected to contract for the second consecutive year this year, the worst performance among the leading Group of Seven economies.
Reuters predicts the collapse of the coalition will deal a further blow to spending and investment, which are already on the decline, with a third of German companies announcing plans to cut back.
"Combined with Trump's victory, economic confidence is likely to decline significantly and makes a contraction in the economy more likely in the fourth quarter," said Karsten Brzeski, head of macroeconomics at ING Bank.
"Given that elections are expected in March, the hope is that the new government will end the economic paralysis and finally bring a clear economic policy and stability," said Brzeski.
Currently, the Christian Democrats (CDU) are in the lead in the polls, but there is no majority for an exclusively center-right or center-left coalition. That suggests it may be just as difficult to compromise on policies in the future, says Greg Fuzesi, an analyst at GP Morgan.
"In this sense, we note that the new elections will bring a similar government," he said.
However, there are expectations that any new government could at least give the economy a boost.
"When the situation stabilizes and a new government with a fresh program takes power after the extraordinary elections, the effect will probably be positive," believes Holger Schmiding, chief economist at Berenberg.
In the short term, the likely delay of next year's budget means that there will be no funding for new projects, although some expenditures such as additional aid to Ukraine may be approved. The government passed the budget over the summer and it was supposed to be approved by parliament by the end of the year, but it could now be delayed until mid-2025.
However, according to Reuters, the departure of the finance minister could allow more spending to support the weakened economy. Scholz argues that Germany has enough room to spend without jeopardizing the health of its finances.
"Among all major economically strong democracies, we have by far the lowest debt," Scholz said Wednesday. "There are solutions for how we can finance our public institutions and responsibilities in a sustainable way".
Polls show that there is currently no clear path to a stable coalition
Germany's public debt is expected to be 2024% of GDP in 64 with a budget deficit of 1,75%, well below the EU limit of 3%. Meanwhile, France expects its debt-to-GDP ratio to reach 113% this year, and Italy's to 135%.
Along with the budget proposal, the government also adopted a package of 49 measures that are estimated to generate additional growth of over half a percent in 2025.
Those plans must be approved by parliament this year to be implemented, meaning the ruling coalition needs the votes of opposition conservatives in the upper house, which represents Germany's 16 federal states.
Scholz said that he will discuss possible cooperation in the steps needed to strengthen the German economy and defense with CDU opposition leader Friedrich Merz.
"Our economy cannot wait until new elections," Solc said.
A source from the government said that Solc and Merc failed to resolve the impasse at the meeting.
The upcoming term of Trump emphasizes the urgency of the situation, Reuters points out.
A report by the German economic institute IW states that, in a scenario where the new US administration imposes 20% tariffs on the European Union, as Trump hinted during the campaign, and the EU reciprocates, Germany's export-dependent economy could shrink by even 1,5% in 2027 and 2028.
Current forecasts show the economy is at risk of stagnation or further decline next year, which would mark the longest period without economic growth since German reunification in 1990.
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