Germany’s government on brink of collapse: What’s next for Europe’s economic powerhouse?

Politics tamfitronics Germany is facing a political crisis after Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, dissolving the ruling coalition amid economic woes and growing dissatisfaction with mainstream politics. Scholz’s Social Democrats and the Greens now attempt to form a minority government while navigating issues like budget deficits, military spending, and Ukraine support

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German Chancellor Olaf Scholz attends a media briefing at the Chancellery after sacking Finance Minister Christian Lindner following a meeting with the heads of the so-called “Traffic Light Coalition” in Berlin, Germany, November 6, 2024. Reuters

The German government has unravelled following Chancellor Olaf Scholz’s dismissal of his finance minister, Christian Lindner, marking a turning point for Europe’s largest economy.

This unexpected upheaval arrives amidst a backdrop of economic stagnation, political tension, and external pressures, with Germany and the European Union facing significant challenges at a global scale.

What happened in Germany?

On Wednesday, Germany’s “traffic light” coalition — an alliance of Scholz’s Social Democrats (SPD), the Greens, and the Free Democrats (FDP) —was officially dissolved. Scholz cited Lindner’s obstructive behaviour on key budgetary issues, accusing the finance minister of putting partisan priorities over the nation’s needs.

“We need a government that is able to act, that has the strength to make the necessary decisions for our country,” Scholz told reporters, highlighting his dissatisfaction withChristian Lindner’s approach to the nation’s economic and fiscal challenges.

The coalition, which formed in 2021, had pledged modernisation and reform, taking over after Angela Merkel’s 16-year chancellorship. However, internal discord over budgetary policy, military spending, and environmental initiatives created a strain within the coalition.

The divisions reached a critical point with Lindner’s refusal to support Scholz’s proposal to suspend the “debt brake” to fund a €15 billion package for Ukraine, and a domestic initiative to cap energy costs for companies amid escalating economic challenges.

Lindner, known for his fiscal conservatism, responded by accusing Scholz of attempting to “strong-arm” him into breaking Germany’s constitutionally mandated spending limit, remarking, “Olaf Scholz refuses to recognise that our country needs a new economic model.”

All remaining FDP ministers — the ministers for transport, justice, and education — have voluntarily resigned from their posts, leaving Scholz to steer a minority government with the SPD and Greens.

What next for Scholz’s government?

In the wake of the collapse, Scholz plans to call a vote of confidence in parliament on January 15. A failure to win the vote would allow Scholz to request a snap election from the president, which would then take place by the end of March.

There is mounting pressure from the conservative opposition to expedite this process; Markus Söder, a prominent CDU figure, argued, “There must be no tactical delays. The confidence question must be put immediately and not next year.”

Until the vote, Scholz will attempt to govern with the remaining SPD-Green alliance, which falls short of the 367 votes required for a majority. With just 324 seats between them, the SPD and Greens would need ad-hoc support from opposition parties to pass legislation.

This leaves Scholz in a precarious position, relying on fragmented alliances to address immediate policy needs. To maintain government operations, Scholz is expected to negotiate support from the conservative CDU-CSU alliance, led by Friedrich Merz, particularly on the budget and defence expenditures.

Scholz noted the importance of “constructive cooperation on issues that are crucial for our country,” calling for unity at a time of heightened national and international tension.

Merz, however, faces a dilemma: while he supports increased defence spending and aid for Ukraine, he may hesitate to lend political victories to Scholz just ahead of an election. Nonetheless, Scholz is determined to seek Merz’s cooperation to address Germany’s economic crisis and uphold critical legislation before a possible election.

Why is Germany’s economy in crisis?

Germany’s economic model is under severe strain. Once a powerhouse of European manufacturing, Germany is grappling with a prolonged economic slump attributed to its disrupted energy supplies after Russia’s 2022 invasion of Ukraine and intensified competition from China.

Scholz aimed to counter this downturn with a series of proposals to boost the economy, including a cap on corporate energy costs andsignificant support for Ukraine. The chancellor’s budgetary plan included an ambitious €15 billion aid package for Ukraine, requiring a suspension of the “debt brake” that limits government borrowing.

This proposal was blocked by Lindner, who has consistently advocated for reduced public spending, tax cuts, and slower progress on Germany’s transition to a carbon-neutral economy.

Robert Habeck, the economy minister and Scholz’s vice-chancellor, expressed disappointment at the coalition’s inability to agree on a “funding gap” for next year’s budget, saying, “Tonight feels wrong and doesn’t feel right. It’s almost tragic on a day like today, when Germany needs to show unity and capacity for action in Europe.”

What does the German public want?

This political disarray arrives amid shifting public opinion. A recent ARD poll showed that 54 per cent of Germans support early elections, and a staggering 85 per cent are dissatisfied with the government’s performance.

The Social Democrats currently sit at around 15 per cent in national polls, trailing the conservative CDU-CSU and the far-right Alternative for Germany (AfD), which hasgained momentum amidst growing disenchantment with mainstream parties.

The AfD has capitalised on issues such as immigration and economic nationalism, positioning itself as an alternative voice in a period of uncertainty.

The Greens, too, have seen their popularity dwindle, polling at approximately 11 per cent, while Lindner’s FDP is at risk of failing to meet the 5 per cent threshold needed to retain seats in parliament if elections were held today.

Why is this bad timing for Germany?

Germany’s political crisis coincides withDonald Trump’s return to the White House, bringing with it renewed uncertainty over US support for NATO and Ukraine. Europe, led by Germany and France, now faces increased pressure to consolidate its defence strategy and financial backing for Ukraine.

The European Union’s two largest economies — Germany and France — are bothmired in political turbulence, complicating EU ambitions for greater integration and unified responses to global challenges.

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Germany’s domestic instability threatens to weaken its role as a leader within the EU and risks slowing down critical defence and economic initiatives.

Asked if Germany was still capable of functioning, Habeck told Deutschlandfunk radio: “Yes, of course we are,” adding however that “we no longer have a majority in parliament.”

With inputs from agencies