Global Macro Research
Global Macro ResearchCan 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
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.
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