Can Germany Afford to Be Europe’s Protector?

Before Friedrich Merz won Germany’s parliamentary elections in February of this year, the country faced a money dilemma: Germany’s economic stagnation required significant reform and investment to revitalize industry, and the United States demanded more spending on collective defense. The budgetary dispute over how to simultaneously address these conflicting priorities had led to the collapse of Chancellor Olaf Scholz’s government. To avoid the same fate, lawmakers in Merz’s grand coalition, comprising the center-right Christian Democratic Union and the center-left Social Democratic Party, as well as the Greens, agreed to leverage debt to finance its dual obligations. Suddenly, Germany was flush with money. 

Seven months in, however, Merz’s government has still been unable to chart a course for economic reform and persuade voters that better days lie ahead. Merz’s bold moves on defense spending have confirmed Germany’s leadership role in Europe but at a cost to his domestic popularity. Merz’s expenditure of significant political capital at international summits to manage U.S. President Donald Trump and defend Ukraine has left him vulnerable to accusations that he is focusing too much on foreign policy and not enough on domestic issues. The right-wing, Russia-friendly Alternative for Germany party (AfD) is channeling economic anxiety to profit in the polls, criticizing Merz’s government for squandering German wealth to build a “war economy.” And although Merz’s efforts on defense have won him praise from the White House, the Trump administration is steadily undermining him by normalizing the AfD and—in the words of the newly released National Security Strategy—other “patriotic European parties.”

Merz’s government does not have much time to hedge against growing discontent within the electorate. Failing to pursue reforms to revitalize and grow Germany’s economy could jeopardize public support for Merz’s centrist coalition. If the Christian Democrats and the Social Democrats cede more ground to the AfD, they may also lose their ability to build viable future coalitions. If the grand coalition proves unable to pursue a path of economic reform and growth, it could break up the government prematurely and reverse Germany’s long-awaited leadership role in Europe, to the detriment of U.S. interests.

Angela Merkel, Germany’s former leader and Merz’s chief rival, became chancellor in 2005 by sidelining Merz and other candidates. She then managed to stay in power for 16 years by avoiding potentially disruptive reforms. This is not a formula that Merz can afford to follow.

MONEY MOVES

Merz entered office with a mandate to build up Germany’s defense capabilities and improve its economy. To avoid the guns versus butter debate haunting many European governments, Merz bucked his party’s traditional preference for fiscal discipline and pushed the parliament to loosen Germany’s debt brake. Established in 2009, the brake caps deficit spending at 0.35 percent of GDP. Soon after this year’s federal election, the German parliament amended the debt brake to allow for unlimited deficit spending on defense and avoid significant cuts in areas such as social welfare. Merz also agreed to earmark an unprecedented 500 billion euros to invest in Germany’s crumbling infrastructure.

At the same time, Berlin has sought to fulfill the country’s obligations to European security. During the NATO summit at The Hague in June, Germany pledged to increase spending on defense to five percent by 2035, with 3.5 percent of that covering core defense requirements. Merz has taken advantage of a degree of fiscal flexibility that Germany’s European peers cannot match: France, for example, is already heavily indebted, whereas the debt brake has afforded Germany a more balanced budget and therefore more room to maneuver. Under pressure, too, from Trump, Merz has already announced a massive increase in Germany’s military spending; the country is projected to meet its NATO pledge well ahead of schedule. Germany’s defense budget—projected at 650 billion euros in total over the next five years—is now the largest in the European Union. Approximately 8.5 billion euros per year is earmarked for support for Ukraine.

Merz also helped secure the sale of U.S. weapons to Ukraine after the Trump administration formally ended its military assistance. He worked out a deal with the American president whereby Berlin and other European countries would purchase Patriot missile systems from Washington and send them to Kyiv. In July, NATO Secretary-General Mark Rutte praised Germany’s leadership and resolve to ensure Europe’s shared security.

DEVIL IN THE DETAILS

Such high marks, however, remain elusive at home. Before entering the chancellery, Merz knew that the efforts he had to make to address security demands and domestic economic challenges could conflict and risked prompting a populist backlash to his agenda. A majority of Germans support increased military spending financed through debt. But many would also like to see the government make debt-financed investments in other priorities, such as industry, pensions, and education.

Germany’s industrial growth has been stagnating since 2019. The German Council of Economic Experts has estimated that the country’s economy will grow by a dismal 0.2 percent in 2025 and 0.6 percent in 2026. Europe’s economic powerhouse is clearly underperforming in comparison with its G-7 peers. Germany’s export-oriented market has also suffered from an influx of inexpensive, state-subsidized high-tech goods from China, which threatens the German auto industry and its millions of jobs. A lack of domestic investment since the adoption of the debt brake in 2009, coupled with Washington’s new tariff regime and Chinese overcapacity, has rendered Germany’s economic model defunct.

Now, with the reform of the debt brake, Merz’s grand coalition has access to sufficient budgetary resources to both increase defense spending and make economic reforms—a position previous governments have not enjoyed. Historically, Germans have opposed deficit spending. Merz’s government is therefore pressed to better justify this change in policy and put its unprecedented additional funds to good use instead of wasting them. Merz is trying to implement an economic reform plan he calls “Agenda 2030,” which includes tax cuts and deregulation as well as some reductions in social welfare benefits. This plan alone, however, has thus far proved inadequate for the scale of Germany’s economic problems. It addresses problems with traditional economic instruments instead of focusing on China’s challenge to German and European industry. In addition, infighting within the coalition over how to spend the 500 billion euro infrastructure fund has raised concerns that coalition members will use deficit spending as a Band-Aid on legacy problems and as a way to service their voter bases rather than create economic opportunities.

Merz has been unable to persuade voters that better days lie ahead.

Failure to deliver has helped the opposition AfD thrive. In 2021, during Merz’s campaign for party leader, he vowed to cut the AfD’s support in half. Today, the AfD enjoys record-high support: a December Forsa Institute poll that asked Germans which party they would vote for showed the AfD above Merz’s conservative camp. Although Germany’s far right supports more defense spending in principle, it opposes financing it through debt and has attacked Merz’s government for relaxing the debt brake. The AfD’s views on defense spending are deeply rooted in a nationalistic conception of German military power outside of constraining institutions such as the EU and NATO.

Putting money on the table for defense has helped Merz manage his relationship with Trump, but members of the U.S. MAGA movement, such as Vice President JD Vance and Representative Anna Paulina Luna, a Republican from Florida, have found common cause with the AfD and are encouraging closer cooperation. This poses a real threat to Merz, who prides himself as a transatlanticist and is trying to keep the postwar German conservative movement’s center of gravity intact against the extremist AfD. Trump’s new National Security Strategy, which officially embraces nationalist conservative parties and even seeks to instigate political change in European countries like Germany, is a further blow to Merz’s efforts.

In the 1980s, Franz Josef Strauss, the legendary chair of the Christian Social Union (the Christian Democrats’ sister party in Bavaria), warned that far-right parties must not be permitted to become the flank of mainstream conservatism. The Christian Social Union should serve as the movement’s outer band. Germany’s political spectrum has since changed, and the AfD is firmly in place as a particularly radical far-right party in Europe. This past May, Germany’s Federal Office for the Protection of the Constitution deemed the party extremist. And yet it has become the most successful far-right party in Germany’s history since World War II.

GROWING PAINS

Merz faces a predicament. The dangers of U.S. retrenchment and Russian aggression require increased defense spending and international shuttle diplomacy. The chancellor understands the stakes, and he has tried to make the case that foreign policy and domestic prosperity are interlinked. But as Helmut Kohl, Germany’s chancellor during German reunification, experienced, foreign policy prowess does not guarantee electoral success.

After his first hundred days in office, Merz had become even more unpopular than his predecessor Scholz, who was the first German chancellor in decades to serve a single term. According to a Forsa poll from early December, 76 percent of Germans are dissatisfied with Merz’s performance as chancellor.

Merz may also become the victim of an internal power struggle. Many conservatives are grumbling about dismantling the debt brake. A younger cohort desires reform of the pension system, which the Social Democrats oppose. Moreover, some in Merz’s caucus are not wedded to sustaining the firewall against the AfD and envision cooperation with the far-right party, an idea Merz absolutely rejects.

Despite the conflicting priorities of the center right and the center left, Merz’s coalition is managing to hold together because another snap federal election could bring the AfD closer to power. Even without a snap vote, however, the grand coalition will face a test in German state elections next year. The AfD enjoys solid support across the country and is polling ahead by double digits in some former East German states. If the AfD wins big in the next federal election, centrist coalition building will become even more difficult. Merz’s tenure as well as Germany’s leadership role in Europe could be short-lived.

EVERYTHING IN MODERATION

Undertaking challenging reforms is nothing new for Germany, and it has generally made the country stronger. Forging East and West Germany into one country after the fall of the Berlin Wall brought economic hardship and fostered resentment among former East Germans, who felt like second-class citizens. Anti-immigrant sentiment dogged Germany in the 1990s, requiring policies for integration. At the beginning of the twenty-first century, Chancellor Gerhard Schröder’s Agenda 2010 tackled loosening the country’s tight labor market and paved a path of economic reform.

Merz must now deliver on his promise for renewal with his Agenda 2030. With more than a trillion euros committed to defense and infrastructure projects over the next four years, Merz has the fiscal means to reboot Germany’s economy and maintain its political center. Germany’s export-led economic model needs to be refashioned to stimulate domestic demand in Germany and Europe. More investments must be made in the defense industrial base to create jobs to replace the ones that Germany’s traditional manufacturers are currently losing because of Chinese exports. The true scope of the Chinese economic threat is only now becoming clear to German leaders.

Failure to deliver has helped the AfD thrive.

Germany is pro–free trade by default, but it must better coordinate its industrial policy with the rest of the EU to help insulate against the worst effects of U.S. tariffs and Chinese overcapacity by seeking new trading partners and building competitive European producers. And with moribund growth and an aging population, Berlin cannot afford to prop up the country’s current levels of social spending. For Germany to remain economically competitive, it must raise its retirement age to alleviate budgetary pressures. Investment in innovation and future technologies cannot be given short shrift compared with social spending.

Such reforms will not magically make the AfD disappear. In fact, they might make the party stronger in the short term. Like other established Western democracies, Germany now has a far-right party embedded in its political system, chipping away at the mainstream parties. But Merz and his coalition can diminish the AfD’s legitimacy by showing voters that providing for European security and investing in Germany’s defense will also trigger a new era of economic growth and competitiveness. To handle the transatlantic relationship with Trump, deter Russian aggression, address economic pressure from China, and ease worries at home, Germany needs Merz’s centrism, not the AfD’s extremism.

Loading…