Germany is facing its worst nightmare – becoming France.
The new chancellor – likely to be Friedrich Merz if Olaf Scholz loses, as expected – has the in-tray from hell after today’s election. Huge sums of money must be found for the misfiring economy, pensions and defence.
There is huge pressure to tear up public spending and debt rules that run deep in the national psyche.
The hyperinflation suffered in 1920’s Weimar Germany, which wiped out savings and made the currency worthless, is blamed for the rise of Hitler.
More recently, German fiscal discipline was the stick used to beat Berlin’s EU allies.
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During the Eurozone crisis, well-heeled German politicians lectured the likes of Greece, Italy and Spain for their irresponsible spending.
Berlin insisted on strict EU-wide limits on budget deficits and public debt after playing an influential role in financing and designing the Eurozone bailout programmes.
The glory days are over
The German economy, the richest in the EU, has been the envy of Europe for decades. Those days are over.
The economy shrank for the second year in a row in 2024, inflation is at its highest for half a century and energy prices are high.
German industry was cut off from cheap Russian gas after Putin’s invasion of Ukraine.
Production and exports have slumped, sales to China are down, and there is now the prospect of US tariffs from Donald Trump.
Infrastructure and businesses are in dire need of modernisation in a land where the fax machine is not yet extinct.
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The population is ageing. Baby boomers born during all-time high birth rates between 1955 and 1969 are retiring, while the workforce shrinks.
This has created a looming pensions crisis, but reforming a system pegged to wage inflation is politically explosive with older and influential voters.
A third of all government spending – about £105 billion – went to pensions last year. That will almost double by 2050.
It’s a terrifying bill to pay but Germany also has to start spending big on defence to deter the threat of Russia and satisfy US demands.
Donald Trump won’t accept Berlin pleading poverty.
Last year, Germany had a record trade surplus of more than £59 billion with the US, its largest trading partner and where it sends more than 10 per cent of its exports.
Chancellor Olaf Scholz announced €100 billion (£83 billion) to overhaul the German army after the invasion of Ukraine. Progress since has been slow and inflation has nibbled away at the fund.
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Mr Scholz, expected to come third in the election, has only promised to meet the minimum NATO defence spending target of 2 per cent of GDP.
Friedrich Merz, the chancellor-in-waiting, has also refused to commit beyond that target, which won’t please a tariff-wielding US president who expects closer to 5 per cent.
The centre-Right CDU leader, a fiscal conservative, must now decide what to do with Germany’s debt brake which was introduced after the 2008 financial crisis.
The ‘debt brake,’ enshrined in the constitution, limits the federal budget deficit to 0.35 percent of GDP, while since 2020, German states have been required to maintain balanced budgets with zero new borrowing.
Mr Scholz’s efforts to reform the rules led directly to the fall of his dysfunctional coalition, Sunday’s election and his expected ousting from power.
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Any change, which requires a two thirds majority in the Bundestag, will be even more difficult for a conservative than the centre-left Mr Scholz.
Mr Merz has suggested he might be willing to weaken the brake to allow for investment in the economy but not to pay for social policies.
Joint European borrowing and pooled debt with EU allies has been mooted to ramp up defence spending after decades of neglect.
Putting German taxpayers on the hook for other more spendthrift EU countries remains hugely controversial, even after Angela Merkel broke the taboo with a “one-off” contribution to fund the bloc’s massive pandemic recovery fund.
Germans associate high debt with economic and political instability.
France, the only rival to Germany as the EU’s most influential country, is already mired in high public debt and is in breach of European rules on national budgets.
Paris knows it must spend more on defence, especially if Mr Trump withdraws US security guarantees to Europe.
Emmanuel Macron’s efforts to reform the French pensions system led to riots and helped create a political crisis that has left him a lame duck president.
France is on its second government in just under three months and few would bet on it lasting long in the fragmented and polarised world of French politics.
Like Germany, French voters are concerned about immigration and security after terrorist attacks in both countries.
Marine Le Pen’s eurosceptic hard-Right National Rally is the largest party in the French parliament. She is poised for another run at the Élysée in 2027, when Mr Macron cannot stand.
In Germany, the far-Right AfD is expected to make historic gains and become the main opposition party.
It will be waiting to pounce if a Merz coalition falls on one of the many hurdles it is facing.
As things stand the European Commission judges Germany to be within deficit and spending limits, while France most definitely is not.
Last year, the French debt reached more than £2.7 trillion, which is 113.7 per cent of GDP.
Germany’s public debt is more than £2 trillion – roughly 62.4 percent of GDP.
Mr Merz may calculate that the only solution to Germany’s many problems is to bite the bullet, face the political blowback, and get out the national credit card.
That risks Germany violating the very EU fiscal rules it once demanded, which could lead to fines from Brussels.
After years of being scolded by Berlin, that would be greeted with much schadenfreude in southern Europe.
No longer a special case, Germany will become like every other European country.
For Germans, it will be a profoundly unsettling experience as they anxiously look at France’s mountains of public debt and ask, “will that be us in a few years’ time?”
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