Executive Summary

• Germany’s three-party coalition ended unceremoniously on Thursday, November 7, following Chancellor Olaf Scholz’s dismissal of German Finance Minister Christian Lindner. 

• Linder, leader of the Free Democrats (FDP), was deposed from his government role following longstanding budget disagreements and issues over the stringent “debt brake” rule. His ousting saw the FDP removed from the government’s coalition, leaving Scholz’s Social Democratic Party (SPD) and its remaining coalition partner, the Greens, without a mandate to govern. 

• A confidence vote is set for 16 December; if Scholz loses the vote, a snap election is now confirmed for 23 February 2025. 

• Germany’s response to its current domestic political quagmire will likely shape its trade and foreign policy outlook, particularly concerning the US, over the coming decade; in tandem, its next steps may inspire European neighbours to follow suit - at a critical juncture for the wider region.

Germany stands at a critical crossroads of political instability, economic uncertainty and evolving international relationships. The recent dismissal of Finance Minister Christian Lindner by Chancellor Olaf Scholz has intensified internal government conflicts on various issues. Simultaneously, Donald Trump's historic re-election as U.S. President has shaken economic confidence and may strain transatlantic ties. Domestically, surging support for the centre-right CDU and the rise of the far-right AfD cast doubt on Scholz's leadership ahead of a crucial confidence vote. Amid these challenges, Germany must redefine its role in European security and global affairs. 

Background

Coalition’s demise

Chancellor Olaf Scholz announced the dismissal of his Finance Minister Christian Lindner of the FDP the day after President-elect Donald Trump secured a historic victory as only the second US President to serve two non-consecutive terms. Major disagreements between Schulz and Linder had been brewing over the last 12 months, dating back to a court ruling which labelled Scholz's spending plans as unconstitutional and incompatible with the Government’s “Debt Brake” policy.

Debt brake

Since 2009, Germany’s fiscal policy has been shaped by a ‘debt brake’ which prevents Germany’s structural deficits from going above 0.35% of its annual GDP. However, a court ruling in November 2023 prohibited Scholz from wielding funds - made available to help the Federal Government confront the implications of the COVID-19 Pandemic - to fund its green transition plans. The ruling not only deemed the attempted reallocation of pandemic borrowing to Germany’s transition plans unconstitutional but also meant an additional $60 billion deficit in the planned revenues and expenditures in the German Federal Budget.

Climax

Since the onset of that ruling, Lindner and Scholz have been unable to settle their ideological divergence in their approach to the country’s fiscal policy. With anti-incumbency sentiment amongst the German electorate, Scholz eventually made his move, ousting Lindner and ending his Government’s fragile mandate.

Current Polling

Anti-incumbency sentiment

German polls have remained consistent in the last 18 months. As of November 2024, polling reveals a strong likelihood that the centre-right CDU party, led by Friedrich Merz,  would return to power, with polls revealing a 31% level of favorability. Conversely, Scholz’s SPD trails the far-right Alternative for Germany (AfD) by one point - holding a mere 17% favorability - while the Greens and FDP trail far behind with 10% and 4%, respectively (below the parliamentary threshold of 5%). Complicating matters further, German media at the end of last year underlined the historically unprecedented levels of disapproval of Scholz's government. The chances for Scholz to navigate a potential snap election, let alone retain his leadership of the party in the forthcoming confidence vote, remain far from encouraging. 

SPD’s last hope?

While Scholz has struggled to endear himself to German voters, fellow cabinet ministers have yet to receive positive assessments from the electorate about how well they have done in their respective briefs. However, compared to colleagues, the SPD’s defence minister, Boris Pistorius, has managed to avert the anti-incumbency spirit, with 53% of Germans approving his time in office. Pistorius’s favorability offers a degree of optimism for the SPD faithful. A September poll from YouGov showed Merz, while the leader of the CDU’s current dominance in current party polling, has a negative approval rating of 51%, further demonstrating the grim political sentiment across Europe’s largest economy. However, reports indicate SPD will rally around Scholz as their candidate in the upcoming confidence vote regardless of current polling.

Impact of the US Election

Economic

Pre-existing relations

The importance of Germany’s economic ties with the United States cannot be understated. Germany remains the US’s key trading partner in Europe. As the region’s largest economy, Germany exports a total worth of $160 billion to the United States, while US imports equate to approximately $77 billion in value. In this same vein, US-Germany bilateral trade totalled $324 billion for 2023, with US investments in Germany amounting to $190 billion. However, the results of the 2024 US election and domestic economic sentiment have caused uncertainty in the future of this relationship.

Post-US election

Within hours of the election results indicating a Donald Trump victory of historical merit, German economic sentiment began to falter. Germany’s premium domestic economic sentiment index, the ZEW index, noted the second lowest recorded drop in 2024, with confidence dropping from 13.1 to 7.1;  a stark contrast to the year’s sentiment average of 25 points. Germany was not alone in its low economic confidence, with the ZEW’s eurozone index sentiment dropping from 20.1 to 12.5.

What to expect

These preliminary figures indicate a lack of German optimism ahead of a second Trump term. Germany, like Europe, depends on open markets, but with an ever increasingly protectionist US - now headed by a pro-tariff President - ZEW President Achim Wambach has raised the concerns shared by many domestic German investors and businesses. The President-elect’s proposed trade strategy would only “exacerbate Europe's economic problems”, Wambach argued, and “European companies will feel even more compelled to produce in the USA instead of delivering finished products there”. Since Trump’s resounding victory, Merz has heavily criticised the Scholz Government for failing to anticipate and prepare for a second Trump Presidency, offering a more productive and clear approach to expanding and retaining the current state of US-German relations. Specifically, Merz, who previously served as Chair of Black Rock’s Asset Management Division in Germany, said he would be open to negotiating Germany’s recent purchase of US F-35 fighter jets - stating that Germany should be able to service these goods locally with American support. Yet, given the ambivalence of the President-elect’s administration appointments and the reception of his dogmatic commitment to an asymmetrical trade policy, business and investment activity will drop in the short to medium term against the backdrop of modest figures expected ahead in the upcoming two quarters.

Defence

Current context

Germany’s approach to defence has remained strongly aligned with its commitment to NATO and its partners. Germany overtook the UK as the second largest spender in NATO—spending a total of approximately $98 million in 2024—but its provisional defence budget for 2025 was notably less than its Defence Minister, Boris Pistorius, had asked for. This provisional budget was, of course, laid out months before the ongoing political strife Germany currently finds itself in.

Trump era implications 

It is widely expected that a second Trump term will force NATO members to commit to spending 3% of their GDP. Trump’s opinion of NATO and threats of withdrawing from the military alliance certainly colour the urgency of taking Washington’s new President seriously on defence matters. Matching this spending commitment will prove a major challenge. It took a decade for NATO partners to reach 2% of GDP. Germany only managed to achieve the latter in February of this year. Yet, while Germany’s commitment to NATO remains resounding, its ability to afford to do so remains increasingly challenging. Pistorius has expressed his displeasure at his Chancellor's lack of defence spending. The perceived inability of Germany to match spending commitments will prove problematic if it is to portray itself as a credible, committed NATO ally and a reliable partner for the US. Indeed, with a German-based academic lamenting the current leadership vacuum in Europe, Merz has pledged to lead Germany as a key player on the global stage - specifically positioning Germany as a potential ‘leading middle power’. Germany’s role in European security cannot be understated, but Washington will hardly take kindly to its ambivalent approach to meeting its spending commitments.

Trump Appointment

It has now been reported that Trump will appoint Marco Rubio as his Administration’s Secretary of State. While Trump’s views of NATO are widely known, Rubio’s record suggests he is more amicable to the alliance as he was a co-sponsor to legislation limiting a US president’s capacity to withdraw from NATO. However, he has also been on record for criticising Germany, France, and the UK for not taking on more responsibility within the organisation. While Rubio has supported Ukraine in its conflict with Russia, he has voted against aid for Ukraine and advocated for a swift resolution to the conflict - echoing the US’s increasingly isolationist approach.

Looking ahead 

In the coming years, Germany’s approach to defence will need to move beyond just spending commitments and actively seek to influence its neighbours to rally to ensure US commitment to European security does not come at the expense of Ukrainian sovereignty. Hertie School Professor Mark Kayser spoke of the vacuum in European leadership following Trump’s reelection. For Germany to fill this gap, defence must become a priority.

Next Steps

Confidence Vote

Initially expected to be held sometime in January, Scholz has confirmed that it will occur on 16 December. During this event, the Chancellor will seek a vote of confidence from the Bundestag in support of his leadership of the German Government. In the event of a vote of no confidence, the German President, Frank-Walter Steinmeier, will dissolve parliament for 21 days before an election is held to appoint a new government. 

Snap Election

Initially expected to be held in March, Scholz agreed to push the date back, settling for 23 February 2025 in an effort to compromise with CDU demands for an election date in January—in line with polls that seemingly reflect a desire to restore German political stability as soon as possible.

In the Interim

The current Chancellor will lead a provisional ‘minority’ government alongside the Green Party until a confidence vote. Former state secretary in the chancellor, Jörg Kukies, has replaced the ousted Lindner as the new German finance minister. Sources from the Budget Committee have revealed that the Government will still be able to deliver on its $4.3 billion pledge to support Ukraine in its defence against Putin’s Russia even if the 2025 budget fails to receive timely approval. The current budget plans will ‘roll over’ to the following calendar year if the latter situation transpires.

Conclusion

Germany needs a proactive government that addresses the challenges it currently faces on a domestic level - especially regarding ageing infrastructure, investment, and competitiveness - and at the regional and international levels regarding matters of European security. It's a strategic place in a post-US-led world order. While Scholz and the SPD hold on, Merz’s remarks about Germany's return to a leading middle power and Pistorius’s unfailingly committed rhetoric to NATO indicate a tacit acknowledgement of the country’s awareness that the time for sustained German leadership in a post-Pax Americana world has arrived. Germany’s leadership at the regional and international levels remains uncertain. Still, regardless of whether Merz or Scholz prevails, the task of managing domestic political disapproval - while rallying European partners to tackle the region’s security per the Russia-Ukraine conflict and US commitment to NATO - is far from over. 
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About the Author 

Antonios Vitalis, Senior Analyst 

Antonios joined London Politica as a Senior Analyst for its European Programme in 2024. Currently, Antonios is an Associate at H/Advisors Cicero on the Pulse team. Joining in August 2022, Antonios oversees public policy intelligence for clients in the net-zero and financial services policy spaces. During this time, he has gained substantial client-facing experience and a comprehensive working knowledge of the EU and UK parliaments and legislative processes. Before joining H/Advisors Cicero, he worked at the Greek Press Office during the Greek bailout crisis of 2015 and interned with the Energy and Natural Resources Division at FTI Consulting. Antonios graduated from King’s College London with first-class honours in Politics before graduating from the London School of Economics with a master’s in international relations.