The break-up of Scholz’s coalition government signals the end of Germany’s old economic model

The coalition could not agree how to fund new support for Ukraine and failed to fully implement the ‘Zeitenwende’. A new government must push through reform.

Expert comment Updated 13 November 2024 3 minute READ

Armida van Rij

Senior Research Fellow, Europe Programme

Dr Patrick Schröder

Senior Research Fellow, Environment and Society Centre

As Europeans were still processing Donald Trump’s victory in the 2024 US presidential election, an acrimonious break up occurred 4000 miles east of Washington DC.

Reports had been circulating for weeks about the fragile state of Germany’s ‘traffic light’ coalition government led by German Chancellor Olaf Scholz, consisting of the centre-left Social Democratic Party (SPD), the Green Party, and liberal Free Democratic Party (FDP).

The expectation had been that the coalition would hold on for a few more weeks and might even be given a new lease of life by Trump’s re-election. Instead, it collapsed on the day Trump’s win was confirmed. An unusually angry Scholtz announced in a live address that he had fired FDP Finance Minister Christian Lindner, effectively breaking up the coalition.

At the heart of the dispute was the so-called ‘debt brake’ – a constitutional mechanism which restricts Germany’s annual public deficit to 0.35 per cent of GDP. Lindner proposed a set of reforms which were unpalatable to the SPD and the Greens. 

In response, Scholz suggested declaring an emergency, which would have suspended the debt brake. That in turn was unacceptable to Lindner, leading to his sacking by the chancellor.

Practically, this means the SPD and the Greens are now in a minority coalition, without agreement on the 2025 budget or the votes in parliament to pass it. They also still face the challenge of the debt brake.

A vote of confidence will take place in December, with elections expected to be held on 23 February 2025.

The end of Germany’s economic model

At the root of Germany’s political crisis is the country’s economic model. For decades, Germany relied on a system that depended on cheap Russian gas, cheap imports of consumer goods from China, high-value exports – particularly in the automotive sector – and the US security umbrella.

With Russian energy no longer viable, the global economic landscape shifting, and Donald Trump on his way back to the White House, that model is no longer workable. And Germany’s economy is expected to contract by 0.2 per cent in 2024 – a contraction for the second year running.

Germany has struggled to turn around its economic woes, with the car industry particularly affected.

The ‘Zeitenwende’, announced by Scholz in the wake of Russia’s full-scale invasion of Ukraine, should have signalled a turnaround of both foreign and economic policy, given how much the two are interconnected. Yet on both fronts, too little changed.

Germany’s reliance on Russian gas did come to an abrupt end in 2022. And Germany is Ukraine’s second largest military aid donor after the US, while accepting the most Ukrainian refugees.

But the ‘Zeitenwende’ turnaround ended there. Scholz’s coalition government failed to prepare for long-term investment in defence at the levels required by creating an off-budget defence spending fund which would have run out in 2027. The draft budget for 2025 showed defence spending would have been cut, as would support for Ukraine.

Germany has also struggled to turn around its economic woes, with the car industry particularly affected. Cheap Chinese EVs and new energy technologies are competing with Germany’s most powerful companies. Volkswagen, the country’s largest car manufacturer, has announced plant closures and layoffs due to shrinking profit margins.  

To the west, Trump’s threat to impose 10 to 20 per cent tariffs on all EU imports meant share prices of Volkswagen, BMW, Mercedez-Benz and Porsche all dropped between 4 to 7 per cent following news of his re-election.

To the east, trade tensions between the EU and China are intensifying. Yet rather than choosing to diversify, German companies have doubled down on their bets in China, with German investment in the country rising from €6.5bn for the whole of 2023 to €7.3bn in the first half of 2024 alone – only exposing carmakers further.

Germany’s support for Ukraine

Like French President Emmanuel Macron, Scholz had already been weakened by the results of the European Parliamentary elections in June. With the collapse of his traffic light coalition, the EU’s Franco-German ‘engine’ is now well and truly stalled – until new leadership can be found. This weakness comes at a perilous moment when clear, united European leadership, and much increased funding, is needed to shore up support for Ukraine.

In the short term, the SPD, Greens, and CDU by and large all agree that support for Ukraine should be maintained. The €4 billion earmarked for Kyiv can still be disbursed under provisional budget management.

In the medium-term, however, it is difficult to see how Friedrich Merz, CDU leader and potential candidate for chancellor, would agree to increase German contributions to the EU budget – essential for long-term support for Ukraine – when negotiations for the EU’s multi-annual financial framework start next year.

Where does Germany go from here?

The SPD–Green minority government’s ability to navigate the coming months will be critical in signalling Germany’s future political and economic trajectory.

If they can maintain stability and enact remaining reforms, including on Germany’s fiscal rules, with the support of the CDU, it may give voters renewed confidence in their ability to adapt Germany’s economy. Some of these reforms are essential, such as measures to support the ailing economy, tax relief for medium and low-income earners, and lowering energy prices for industrial companies. Also on the agenda are measures to secure jobs in the automotive industry and its suppliers.

Germany must reaffirm its commitment to Europe and NATO by making serious investments in its own defence.  

But if political infighting continues, it will embolden parties like Alternative for Germany (AfD), leading to even greater uncertainty about the direction and coherence of German foreign and economic policy.

When a new government emerges, it will need to do more than confront economic headwinds. Germany’s lacking defence policy must be tackled – for real this time. With Trump’s election, Berlin’s continued dependency on US security provision is a risk that can no longer be justified. 

Germany must reaffirm its commitment to Europe and NATO by making serious investments in its own defence. As a starting point, it should significantly raise defence spending in a sustained way as part of the federal budget beyond 2027, as well as earmarking funding for Ukraine.