Germany’s Would-Be Leader Touts His Recipe for a Growth Miracle

For Chancellor-hopeful Friedrich Merz, the keys to unlocking a new era of prosperity lie in revisiting the policies that helped drive Germany’s postwar economic miracle.

Author of the article:

Bloomberg News

Jana Randow

Published Nov 16, 2024  •  5 minute read

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(Bloomberg) — For Chancellor-hopeful Friedrich Merz, the keys to unlocking a new era of prosperity lie in revisiting the policies that helped drive Germany’s postwar economic miracle.

The Christian Democratic Union leader vying to succeed Olaf Scholz is touting a distinctly pro-business agenda of lower taxes, less regulation and fewer handouts informed by a decade of rubbing shoulders with the country’s executives.

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Confidants of 69-year-old Merz say the policy mix employed after 1945, which combined a free market with social protections, has shaped his vision of how to shake off the funk afflicting Germany today. A career hiatus spent in the political wilderness as a corporate lawyer and on company boards has colored that view.

“Our mentality needs to change in some respects,” he said in an interview this month with Stern magazine. “Of course, many people achieve a lot in their jobs. But at the same time, I see too little innovation and too little willingness to make changes that could improve our lives.”

Many in the country’s powerful business constituency would applaud his plan to stop the rot after a run of lost years for Europe’s largest economy even if Merz would likely have to compromise with coalition partners — assuming the CDU’s conservative alliance wins the Feb. 23 elections.

“If companies sense that things are going in the right direction, then that will have an impact,” said Stefan Klebert, chief executive officer of GEA Group AG, a supplier of manufacturing machinery based in Dusseldorf. 

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A bigger question is whether a platform largely rooted in successes of the past can address Germany’s 21st century challenges of waning competitiveness and a faltering, unpopular energy transition. 

The return of Donald Trump to the White House means the next government may also have to navigate a global trade war, complicated relations with Beijing and, perhaps, difficult choices over the conflict in Ukraine — with extremist parties poised to capitalize on any misstep. 

“New elections are good and long overdue, but they won’t be a panacea for Germany,” Klebert added.

Just this week, the Council of Economic Experts that advises the government scrapped its forecast for economic growth in 2024 to predict a second year of contraction, followed by a paltry 0.4% pace of expansion in 2025.

Such prolonged weakness is forcing corporate Germany to retreat. Volkswagen AG, having already lost its crown as the world’s biggest carmaker, is now considering unprecedented factory closures in its home market. Further up the supply chain, parts makers Schaeffler and ZF Friedrichshafen are cutting thousands of jobs.

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“We would urge German policymakers to stay focused on broad-based policies to lift economy-wide productivity,” said Alfred Kammer, director of the European Department at the International Monetary Fund. He points to the need for more investment in public infrastructure, cutting administrative burdens and boosting innovation.

Merz’s pro-market policies chime with some of that agenda, encompassing tax cuts, deregulation and less bureaucracy, all aimed at making Germany an easier place to do business. Early in his career, he said tax returns should become straightforward enough to fit onto a beer mat.

Comments from Merz and his party allies suggest he would seek to unwind some policies enacted under Scholz. They range from a potential resumption of nuclear power, to allowing carmakers to use all available technologies to cut carbon emissions, not just batteries, to a reprieve for combustion engines.

Employees could get incentives to work more and longer, alongside sharp cuts to social security payments for people who refuse available jobs. Merz would also replace a citizens’ income introduced by Scholz with more limited aid.

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But all of that is vulnerable to the coalition negotiations that will likely follow the election. Scholz’s Social Democrats won’t sign up to cutting benefits, while the Greens won’t countenance a revival of nuclear reactors or any concessions on car emissions. 

“Merz has the chance to really make a difference in the next four years,” said Roland Koch, a CDU contemporary who served as Hesse state premier in the decade through 2010. But he “will need a coalition partner, and mustn’t antagonize potential voters. He can’t hold too strongly to his policies.”

Regarding the most controversial pillars of Germany’s economic framework, Merz — a fiscal conservative — has signaled openness to creating an investment fund, as long as it focuses on infrastructure and doesn’t add to borrowing.

He could also contemplate a reform of the country’s brake on debt. Any change could be transformative: Bloomberg Economics calculates that permanently lifting borrowing by 1% of gross domestic product would only cost half that by 2040 because of the growth it would generate.

For Christian Schulz, an economist at Citi, Merz’s policy ambitions are more reminiscent of Gerhard Schroeder, the Social Democratic chancellor until 2005, than of his more restrained CDU successor, Angela Merkel. Schroeder’s Agenda 2010 enacted labor-market reforms that boosted competitiveness and heralded an industrial boom.

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In an echo of that, Merz’s platform is labeled Agenda 2030. He recently described Germany’s prospects as worthy of an A- rating, with a positive outlook. 

His beliefs are founded in a political career in the CDU, traditionally Germany’s party of enterprise. After falling out of favor with Merkel, he served in advisory or board positions at companies including investment firm Blackrock’s German subsidiary, auto parts maker Robert Bosch GmbH and stock exchange operator Deutsche Boerse AG. 

“The social market economy must become Germany’s guiding principle again,” said Astrid Hamker, president of the Economic Council of the CDU, a business association affiliated to the party that represents more than 11,000 firms. “Merz is really well equipped for this. He lives and breathes it.”

When returning to politics in 2018, Merz described himself as “an economic liberal, a socially conservative and a socio-politically engaged person.” 

Much of that places him in the mold of Ludwig Erhard, the economy minister whose post-war stewardship kicked off Germany’s stunning recovery that lasted until the oil crisis of the early 1970s.

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Whether the recipe to that boom can work again several decades later, in an era dominated by tech giants, is likely to be a major test of a Merz premiership. In any case, political reality will prove a brake to what he can actually do in office.

Assuming polls prove correct and Merz’s CDU does win the biggest vote share, finding common ground across the political spectrum will be essential.

While former Finance Minister Christian Lindner’s Free Democrats would be a natural ally, that party might struggle to get into parliament. With the CDU unwilling to work with far-right or more-extreme left parties, Merz may be left courting Scholz’s Social Democrats or the Greens, either of which are likely to water down his platform. 

“Germany needs a secure and competitive energy supply, competitive taxes, better transport infrastructure and reductions in bureaucracy,” said Joerg Kraemer, chief economist at Commerzbank. “We’ll see if there’s a majority in favor of such policies. Current polls suggest that will be a struggle.”

—With assistance from Arne Delfs.

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