In 1966, Germany formed its first “grand coalition” government in postwar history to address an unexpected economic downturn and growing concerns over a nascent neo-Nazi far-right movement. Nearly six decades later, Germany is on the cusp of another grand coalition, with the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) preparing to join forces after February’s snap election. Although the challenges today appear similar to those of the past, the circumstances and stakes are much more critical, signaling a shift in German politics that could reverberate across Europe.
Germany’s current situation is shaped by a combination of internal stagnation and external geopolitical upheaval. The German economy is enduring its longest period of stagnation since World War II, and growing tensions across the globe are putting pressure on its trade-led economic model. Meanwhile, the extreme-right Alternative für Deutschland (AfD), which is seen by security services as a threat to Germany’s democratic constitutional order, has become the second-largest party in the country. Additionally, the rise of a Putin-sympathetic Donald Trump, who has undermined transatlantic security alliances, is further complicating Germany’s international standing.
In response to this challenging backdrop, German politics is undergoing rapid transformation. Chancellor-elect Friedrich Merz, at the helm of the CDU, is leading a historic shift in Germany’s fiscal and defense policy. The Bundestag recently voted to amend Germany’s Basic Law, allowing for a significant increase in public investment in defense, national infrastructure, and the climate transition. This change effectively sidesteps the “debt brake,” a constitutional limit on borrowing that has long been a symbol of Germany’s conservative fiscal policies. By doing so, Germany is shifting from its traditional fiscal conservatism to a more proactive approach, with an emphasis on bolstering European security and addressing long-standing domestic challenges.
This transformation is particularly striking given Merz’s background as an economic liberal and former investment banker. His embrace of a more active state marks a dramatic political shift. Merz has moved away from the strict fiscal discipline that has defined German policy for decades and is now advocating for substantial public investments in critical areas. Although the investment package must still be approved by Germany’s upper house of parliament, the response from the markets has been positive. Shares in defense companies and major manufacturers, such as Volkswagen, have risen, reflecting growing confidence in the country’s future economic direction. This shift is seen as a critical step toward alleviating fears of deindustrialization and addressing the populist surge of the AfD.
A Bold Shift in Political Strategy
For both the CDU and the SPD, the new coalition represents a bold leap into unknown territory. In recent years, coalitions across the political spectrum have delivered stability but often lacked the urgency and energy needed to address the challenges facing Germany. During Angela Merkel’s tenure, the CDU dominated the political landscape, but the SPD, as the junior partner in coalition governments, lost much of its identity and purpose. The rising tide of nationalism and xenophobia, particularly among working-class voters, added to the sense that the political establishment was failing to address the needs of ordinary citizens. This disillusionment led many to flock to the far-right AfD, which capitalized on economic frustrations and anti-immigrant sentiments.
The prevailing fiscal orthodoxy, emphasizing austerity and budgetary restraint, has also been a source of frustration for many. While this approach helped Germany weather global financial crises, it also contributed to a broader political malaise across Europe. The focus on fiscal discipline was ill-suited to the growing challenges of a rapidly changing world, and it failed to respond effectively to issues such as climate change, industrial decline, and social inequality. This failure to adapt contributed to the rise of populism and a crisis of confidence in the political center.
The new coalition, however, is designed to break free from this era of stagnation. Merz’s government is committed to a more active state, emphasizing public investment in defense, infrastructure, and the climate transition. This shift is crucial not only for Germany’s domestic stability but also for Europe’s future. By reinvigorating Germany’s industrial base, strengthening European security, and addressing the climate crisis, the new coalition is positioning Germany as a leader in tackling some of the most pressing challenges of our time.
The Radical Centre: A Model for Other Democracies?
One of the most compelling aspects of this shift is the emergence of what could be described as a “radical centre.” In recent years, Western democracies have struggled with growing polarization and the rise of populist movements. Many political leaders have spoken of the need for a “radical centre” to address these challenges, but it has often been little more than a rhetorical slogan. In Germany, however, the radical centre is taking concrete form through a combination of bold fiscal policies, increased public investment, and a more assertive role for the state in shaping the country’s future.
Merz’s government is a clear departure from the fiscal conservatism that has long defined German politics. The decision to allow for significant public investment in key areas marks a critical turning point in Germany’s economic and political trajectory. This shift is particularly notable given Merz’s background as a proponent of market-oriented economic policies. His newfound support for a more proactive state is indicative of a broader shift within the political establishment, one that recognizes the need for change in the face of growing domestic and international challenges.
The significance of this shift extends beyond Germany. Countries like the United Kingdom and France, which have also faced economic stagnation and the rise of populism, could benefit from taking note of Germany’s new direction. The shift towards greater public
investment and a more active state is a response to the limitations of traditional austerity-based policies.
As populist movements continue to gain ground across Europe, Germany’s experience could offer a model for other Western democracies seeking to address the root causes of political
and economic instability.
Challenges Ahead
Despite the promise of the new coalition, significant challenges remain. The shift away from fiscal conservatism will likely face resistance from conservative factions within the CDU, as well as from those who have long championed Germany’s commitment to balanced budgets and debt reduction. While the shift toward public investment is a bold and necessary step, it will take time to implement fully, and its success will depend on Germany’s ability to navigate the uncertainties of the global economy, including inflation, supply chain disruptions, and potential economic slowdowns.
Furthermore, Germany’s new approach to defense and European security will be tested by the evolving geopolitical landscape.
The growing threat from Russia, combined with the ongoing challenges posed by global instability, will require Germany to play an increasingly active role in maintaining peace and security in Europe. Whether Germany can maintain this more proactive stance will depend on the country’s ability to balance its domestic priorities with its broader international responsibilities.
