Frankfurt, Germany – Friedrich Merz failed to win the election as German Prime Minister in the first round of votes in Parliament – he won in the second, but questioned his new government's ability to implement a plan to drive Europe's biggest economy out of stagnation.
Tuesday's stumbling at the start of his new coalition government between his union bloc and the Social Democrats added uncertainty to the future of an economy that has not seen great growth even before the Covid-19 pandemic.
Above all, Merz was expected to end the expenditure and budgetary disputes that both plagued his predecessor, Olaf Scholz, which collapsed in November. His February 23 election victory and coalition contract appears to provide assurances that the government can end policy paralysis and tackle challenges such as delayed investment in growth-promoting projects, choking of bureaucracy and lack of skilled labor.
However, the first round of Congress flop raised questions about what a solid Meltz majority would look like and whether reforms could be passed to increase growth after two years of reduced power. The resignation government has predicted zero growth this year.
“The failed vote, and the fact that it came out of the blue, has already weakened Merz significantly,” says Franzisca Palmas, a senior European economist in capital economics.
“His promise to run a much more efficient and conflict-free government seems far less reliable now, and it would be more difficult than expected to offer his economic proposals, including a significant increase in defense and infrastructure spending, corporate tax cuts, bureaucracy reductions, and digitalisation,” Palmas added.
Mertz's coalition has 328 members in the new council. The fact that he only received 310 votes in his first secret vote – when he needed most of the 316 out of 630 votes, led to speculation that some financially conservative lawmakers were resisting his post-election decision to loosen German constitutional restrictions on deficit spending and set up a fund of 50 billion euros.
These measures were passed in the resignation of the legislature.
Meltz won the election with 325 votes on his second attempt, but suffered major losses. He “is inaugurated with two black eyes and a shaking knee,” said Andrea Loemmele, professor of communication and politics at Berlin's Herti School.
I hope that the government will soon drive new investments and reforms. “Something about this is what we're talking about,” said Carsten Brzeski, global chief of ING Bank's macros.
For years, debt has been criticized for constraining spending on infrastructure and ultimately slowing growth. Additionally, China has moved from the lucrative export markets of German companies to competitors of German experts, such as automobiles and industrial machinery. The broad permitting process has been accused of slowing new business projects, but the loss of cheap Russian natural gas from the Ukrainian invasion has increased the energy costs of businesses.
The vote was a “bad surprise,” but some of the tough decisions on spending and debt restrictions were already in the resignation of the Legislature, said Holger Schmeading, chief economist at Belenberg Bank. “There's extra financial space… today's upset will probably not affect the way defense and infrastructure extra money is allocated in key ways.”
Schmetting pointed out that most votes in Congress were not by secret votes, and could hinder some members of the coalition who encouraged Meltz to vote against the legislative bill.
The decision to set up an infrastructure fund outside of debt restrictions has raised government hopes for withdrawal from spending and stagnation. These hopes were curtailed on April 2 when US President Donald Trump announced numerous new tariffs on almost all US trading partners, including a 20% tariff on goods from the European Union.
It was quickly added to the headwinds of Germany's export-controlled economy amid uncertainty about whether EU officials could negotiate lower tariff rates during the 90-day suspension laboratory before tariffs became effective.
