In what can be seen as a global political trend towards vacating the political centre by democracies around the world, Germany’s fragile coalition government – led by the Social Democrats (SPD) and formed in 2021 – has fallen apart.
Tensions over spending erupted in Chancellor Olaf Scholz’s firing of Finance Minister Christian Lindner for opposing increased government borrowing.
This culminated in the withdrawal of the conservative Free Democrats (FDP) from the coalition, which of course leaves Scholz in a minority government.
Fragile, unlikely union
The diverse mix of ideologies had included the pro-business FDP, the centre-left Social Democrats (SPD) and the environmentally focused Greens, and was named ‘the traffic light’ coalition for each of the constituent parties’ colours.
From the start, the unlikely coalition faced inevitable internal tensions, with the SPD and Greens focused on social and environmental spending, while the FDP embraced fiscal conservatism and a populist stance on border control.
The conflict arose over the contentious debt brake – a constitutional cap on borrowing similar to America’s debt ceiling.
Scholz advocated for increased spending to stimulate growth, but Lindner resisted lifting the brake.
Economic stagnation
Economic stagnation had been putting political pressure on the group since it was formed, and can be sheeted home to several external and internal factors.
For starters, the country’s reliance on energy-intensive industries left it vulnerable after Russia’s invasion of Ukraine.
Resulting high energy costs have been slugging sectors like manufacturing, with automotive giants such as Volkswagen (ETR:VOWG_p) exploring cuts to domestic production, which of course impacts local jobs and economic stability.
As a consequence, Germany’s economy has grown just 0.2% over the last five years, compared to stronger Eurozone economies like France (4.1%) and Italy (5.5%).
Ominous political sentiment
This slow growth has undermined public confidence and stoked some ominous political divisions, including the rise of extremes both on the left and right.
There has been a resurgence of support for leftist parties and policies, with left wing party Die Linke enjoying renewed support from voters who feel abandoned by centrist parties.
This is mirrored by a surge of political activity on the far right, with the extreme right AfD (Alternative für Deutschland) gaining ground, especially in economically hard-hit areas and winning a state election in Thuringia.
This is the first such victory for the far right since the end of the Second World War.
The abandonment of the political centre has been exacerbated by the perceived mishandling by the traffic light coalition of economic and migration issues.
Immigration has returned as a political football, with the right capitalising on public unease.
Scholz’s government, which has had to internalise views from across the divide on how to handle the issue, has been wedged into introducing stricter border policies and accelerated deportations for rejected asylum seekers.
And yet the right has predictably continued to fan the flames of discontent on this front.
Trade tensions
China’s rapid expansion into high-tech manufacturing has impacted German exports, particularly in the automotive and machinery sectors.
This loss of competitiveness is hurting Germany’s traditionally strong export economy.
Meanwhile, iconic German manufacturers like Volkswagen, facing global competition and internal restructuring pressures, are now considering domestic plant closures – a move symbolic of broader industrial challenges in Germany.
And the geopolitics are about to get even more complicated.
Trump’s return complicates matters
Former US President Donald Trump’s return will place a strain on US-German relations, especially on trade and defence policies, with a lack of clarity on the extent of Trump’s support for NATO, in which Germany plays a key role.
The new landscape requires a strong and united Germany to negotiate with the likes of Trump – and Putin – and Scholz faces a test of diplomacy as Germany navigates incoming potential economic and political friction with the US.
With Germany’s economy under pressure and political stability in question, the coalition’s collapse may impact the country's role in the European Union, especially on policies like climate and trade.
For now, Scholz will continue to head a minority government until the confidence vote on January 15. If he needs to pass legislation in the meantime, he may need support from opposition parties like the Christian Democratic Union (CDU), led by Friedrich Merz.
The right wing AfD’s recent gains and the timing of the government's collapse could cause Europe’s largest economy to lurch to the right in the coming months.