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The German national election results of 23 February 2025 remain a challenge for the parties of the democratic centre. The coalition parties of the 2021 government suffered massive losses, with the FDP failing to retain its seats in the Bundestag. The CDU/CSU won fewer seats than hoped for and remained below the 30% mark. For the first time, the centrist parties do not have a two-thirds majority in the Bundestag, which is necessary to amend the constitution or elect judges. This, together with the election result of over 20% for the AfD, now considered a secure right-wing extremist party, is an expression of the citizens' mistrust in the political centre.
Although the coalition agreement underpinning the new government was negotiated relatively quickly and quietly, differences of opinion about its interpretation began to emerge even during the SPD vote, which was fairly clear-cut with 85% approval. The fact that the new Chancellor Friedrich Merz needed a second ballot for his formal election and that the coalition openly disagreed about the interpretation of the coalition agreement in the days following the swearing-in of the cabinet rounds off the picture of a bumpy start.
However, the cabinet has all the prerequisites on both sides to work together pragmatically as a team. Personality took precedence over internal party proportional representation in the selection of ministers. The choice of high-ranking officials demonstrates a desire to bring in experienced experts.
With the change in the rules of the constitutional debt brake, which now also gives the states leeway to incur debt and, above all, allows for virtually unlimited defence spending, Germany has ushered in a paradigm shift in its budgetary policy.
All of this must now be translated into good governance and good communication. This is because the government is doomed to succeed if the AfD is not to have a realistic chance of becoming the strongest party in 2029.
Merz has used the fact that the Chancellor and foreign minister belong to the same party, for the first time in 60 years, to massively strengthen the Chancellor's power in foreign, security and European policy. In future, a National Security Council based in the Federal Chancellery will coordinate foreign and security policy. A European coordination body headed by the Federal Chancellery will be introduced, allowing the Federal Chancellery to take over EU dossiers in the event of a dispute. This offers the chance to end the cacophony of German foreign policy and means that Brussels will no longer have to put up with a ‘German vote’ (i.e. abstention). This goes hand in hand with a clear focus; Merz will prioritise this policy area, as his government statement and intensive travel activities in the first few weeks have already shown.
The Chancellor and his government are also setting new priorities in terms of policy. Merz intensified cooperation with French President Macron even before taking office. In his government statement, he assigns a special role to Poland, and Germany will also position itself as a reliable and predictable partner to smaller countries. This government can therefore be expected to show commitment and play a constructive leadership role in Europe together with France and Poland, even if the outcome of the presidential election in Poland raises new questions. The CDU/CSU and SPD have agreed on a common line towards China in order to avoid the previous disagreements between the Foreign Office/Baerbock and the Chancellery/Scholz. The line is now clearer – China is increasingly viewed critically, but the tone remains moderate.
The government continues to face enormous challenges, which are only touched upon very superficially in the coalition agreement and will inevitably reveal differences of opinion that have been glossed over. Despite immense debt margins, further consolidation measures are needed in the budget. In addition, new expenditures in the coalition agreement - particularly in energy and pension policy - must be financed. The SPD wants to raise taxes, which is taboo for the CDU/CSU. Nevertheless, a huge stimulus package (special depreciation for an "investment booster" and a gradual reduction of corporate tax to 15% from 2028 onwards) was decided by the Federal Government in the beginning of June.
Although more pragmatism is to be expected in energy, climate and environmental policy, it remains entirely unclear how the climate targets explicitly confirmed in the coalition agreement can be achieved without far-reaching measures. The new Minister for Economic Affairs, an experienced energy manager, is expected to pursue a pragmatic, less dirigiste energy policy.
Problems and goals have been identified in both pension and health policy, but the search for solutions has been postponed to expert commissions, which will not present their findings until later in the legislative period. One thing is clear. Without significant cuts to social security benefits, contributions will rise at the expense of the competitiveness of the German economy and thus of jobs. However, these are rejected in principle by the SPD, which is focusing more on new sources of financing.
The new Digital Ministry will be responsible for digital policy and the operational digitisation of the federal administration, including the investment budget. This at least creates the conditions for Germany to catch up in this field. In his government statement, the new Digital Minister Wildberger announced a very business-friendly course. The decisive factor will be how quickly the new ministry is able to take action.
With the €500 billion special fund for infrastructure that has been approved, Germany can now tackle the backlog in its national infrastructure. The special fund will be included in the 2025 budget in September 2025 and will then provide reliable investment funds for additional investments over a period of 15 years. Behind the scenes, lobbyists are already arguing about what constitutes ‘investment’ in this sense and what does not. For providers, this means a high degree of reliability. Conversely, the government is aware that these funds can only be used sensibly if bureaucratic obstacles in standards, planning processes and tenders are removed. Here, too, conflicts are inevitable.
The 2025 federal election was another strong indication of structural changes in the party system. Centrist parties continue to lose support, while the extreme fringes are gaining strength.
Against this backdrop, the parties will review their orientation. It has become clear that the CDU/CSU cannot simply adopt a slightly more conservative stance and expect to regain election results in the mid to high 30% range and marginalise the AfD. With an average federal result of 16%, the SPD is now only a fringe party in many areas. Party leader and Vice-Chancellor Klingbeil is now seeking salvation in a pragmatic focus on the working (not welfare-dependent) middle class. Klingbeil is clearly organising his team and agenda with a view to running for chancellor in 2029.
And finally, there is the AfD, which was recently classified as a confirmed right-wing extremist party by the domestic intelligence service. This could theoretically justify a ban on the AfD before the Constitutional Court; in addition to the legal risks of such a ban, the political discussion raises one question in particular. What to do with the 20% of AfD voters who have not been bothered by the AfD's well-known right-wing extremist positions, for example?
Support for the political and economic system and the centrist democratic parties that uphold it has always been positively correlated with political outcomes – economic growth and the resolution of real problems. For the first time in a long time, Germany has a government that is aware of these connections and no longer denies the problems. This, together with the financial opportunities that have been created, now makes it possible to tackle the challenges pragmatically.
This blog was written by Andreas Krautscheid and Markus Becker-Melching supported by wider Flint Germany team. Flint Germany advises companies and investors on complex political and regulatory risks that impact corporate success. Flint Germany helps anticipate, interpret, and respond to developments in politics and administration. We offer regulatory and competition policy advice with a focus on strategic public affairs, regulatory approval procedures, and regulatory due diligence. We collaborate with our colleagues in Brussels, France, the Netherlands, the UK, as well as in the Asia-Pacific region and the US, as needed. For more information, get in touch.