Merz Wins German Election Amidst Economic Challenges and Debt Limits

Friedrich Merz and his center-right Christian Democrats secured victory in Germany's election on Sunday, but their triumph may be short-lived. The incoming government, almost certainly led by Mr. Merz as chancellor, confronts a multitude of challenges, including a stagnant economy, President Trump’s threat to impose tariffs on the country’s crucial export industries, and the ongoing war in Ukraine, entering its fourth year.

Adding to the complexity, the ability to address these pressing issues is severely constrained by strict limits on government debt and deficits. This fiscal constraint makes it difficult to finance essential expenditures such as higher military spending, modernization of crumbling infrastructure, and other initiatives deemed crucial by economists to stimulate economic growth.

A Contested Fiscal Rule

The dispute over this rule, known as the debt brake, ultimately led to the downfall of Chancellor Olaf Scholz’s center-left Social Democratic government, paving the way for Sunday’s early election. However, relaxing the debt brake would necessitate a two-thirds majority in Parliament to amend the Constitution, and the election outcome suggests that securing such a broad consensus would be highly challenging.

Even before the dust settled on the election, Mr. Merz faced mounting pressure from various quarters – politicians, economists, and even the traditionally conservative central bank – urging the new government to find a solution to adjust the spending limits in response to Germany’s urgent economic needs.