The Countdown Is On.

Germany’s New Government and the Race to 2029.

© Deutscher Bundestag | Parlamentsfernsehen

Today should be a cause for celebration, yet tensions are high. A new German government was just sworn in under the leadership of veteran politician and newly elected Chancellor Friedrich Merz, but even he acknowledges the gravity of the situation: “This is not the time for euphoria,” Merz told his party members last week — he knows that his government needs to deliver, especially on the economy.

It’s only been ten weeks since the German snap elections that followed the collapse of Chancellor Scholz’s so-called traffic light coalition. What started as an alliance to “dare more progress” will largely be remembered for the many public disputes between its three governing parties. Irreconcilable disagreements regarding the government’s budget ultimately led to the collapse of the first national three-party coalition in German history and the subsequent national election on February 23, 2025.

‘Project 2029’

After spending almost four years in the opposition, the conservative Union (CDU/CSU) reclaims its position at the helm of the state, despite its second-worst showing at a national election ever (28.5%). Traditionally, a centrist government between Chancellor Merz’ conservatives and the moderate SPD (16.4%) is known as the grand coalition. Yet, this time, it feels wrong to describe it in such overblown language, with some pundits opting for the label ‘high-risk’ coalition instead.

This is because Germany’s new government is widely considered the country’s last chance to strengthen democracy, uphold Germany’s pro-Western’s orientation, and stop the rise of the far-right extremist Alternative for Germany (AfD) (20.8%).

It’s no secret that the AfD hopes to win the country’s next national election in four years, a goal that the party internally refers to as ‘Project 2029’. By then, the far-right party hopes that Germany’s situation will worsen and public distrust in the political establishment will deepen to the point where the so-called firewall against the AfD collapses — first at the state level and, by 2029, nationwide. 

Without a doubt, the AfD may well be on the track to surpass Chancellor Merz’ party, especially if his new government fails to deliver popular and effective policies. Given that the far-right managed to double its support since the last national election in 2021, an electoral victory is not out of reach. The party is already dominant in all of eastern Germany, where it’s the most popular party across all five federal states (34%). Fortunately for Chancellor Merz’s coalition, this year’s exit polls suggest a clear strategy to curb the AfD’s growth: fixing the German economy.

It’s the Economy, Stupid.

Although Bill Clinton’s famous catchphrase is overused to the point of cliché, it remains as relevant as ever to describe the situation in Germany today. As of this year, the AfD is officially the most popular party among blue-collar workers, unemployed voters, and low-income earners by a considerable margin. 

It’s clear that economic concerns play a significant role in AfD voters’ decision to support the far-right: compared to supporters of other parties, AfD voters are the most likely to express fears of social decline, deep concerns about rising prices, and anxiety over financial hardship in old age. All in all, 96% of AfD supporters describe Germany’s economic situation as poor. And they’re not wrong.

To this day, Germany remains the only G7 economy yet to rebound post-pandemic, with its real GDP today sitting slightly below its 2019 level (-0.9%). While the German economy has contracted over the past two years, other countries have delivered far stronger results. On average, EU member states recorded 4.9% growth over the past five years, while the United States’ real GDP rose by an impressive 12.2% over the same period.

Unless the new government can deliver tangible improvements and revitalize the economy, disillusioned voters will likely keep drifting toward the AfD. Fixing the economy has thus become a central imperative for Chancellor Merz’s coalition — the only question is how to fix it.

Unpacking the Recession

On the surface, there are two acute drivers for the country’s recession: weak private consumption and a struggling industrial and export sector. The decline in consumption can be explained by real wages still being 2% below their 2019 levels, coupled with a widespread economic uncertainty over the stagnating economy and potential job cuts. In other words, consumption is low because many households can no longer afford everyday goods — or because they’ve exhausted their savings in recent years and are now trying to rebuild financial reserves.

As previously mentioned, the AfD draws its strongest support from economically vulnerable groups. Increasing the German people’s purchasing power and restoring a sense of economic stability are therefore essential steps not just for reversing the recession — but also for curbing the far right’s growing appeal among those who feel left behind. 

Weak private consumption, however, isn’t just the result of cautious households: businesses, too, are holding back on spending. Economist Patrick Kaczmarczyk notes that German companies currently lack the planning certainty needed to invest: “Firms invest when they see a return,” Kaczmarczyk notes, citing historically high energy costs and a weak domestic market as examples for why investments in Germany remain sluggish and the traditionally strong industrial sector is struggling.

However, upon closer inspection, the roots of Germany’s economic crisis lie much deeper, as they are, ultimately, structural in nature. Recently, the country’s business model has come under increasing scrutiny, with many observers questioning the viability of Germany’s continued reliance on high-end exports. 

Low international demand for German products due to increasing economic competition with the United States and China has exposed the vulnerabilities of an export model that long depended on a stable rules-based global order, cheap energy imports from Russia, and access to vast consumer markets. The United States’ erratic tariff policy and growing competition from China in key markets, such as car manufacturing, have underscored the fragility of this strategy and highlight the need for change.

This challenge is further compounded by Germany’s slow pace of domestic reform, particularly in the areas of digitalization and, even more importantly, its transition to a sustainable economy. While poor management decisions by companies like Volkswagen have hindered progress on the green transition, political leaders also bear responsibility for failing to establish clear and reliable conditions for reform. Given that measures such as CO² pricing disproportionately affect low-income households, as they spend a greater share of their income on transportation and heating, it’s once again AfD voters who are particularly affected by the potential consequences of ineffective climate governance.

Lastly, a single glance at the country’s public net investments over the past decades also highlights an uncomfortable truth: Germany is suffering from a massive investment backlog. German infrastructure has been neglected for decades; a significant chunk of the country’s roads, bridges, telecommunication networks, school buildings, hospitals, energy and water systems, and railroads are in dire need for renovation. For instance, experts estimate that around 5,000 of the 40,000 highway bridges need to be urgently repaired, if not demolished and rebuilt. According to economist Sebastian Dullien, Germany needs up to 600 billion euros over the next ten years for both infrastructure upgrades and the green transition.

Time for a Wirtschaftswende 

What Germany needs, then, is nothing short of a Wirtschaftswende, an economic turnaround. For Chancellor Merz and his coalition, the stakes are historic. This is not just about stimulating growth or balancing budgets, it’s about rebuilding confidence — in the economy, in the state, and in democracy itself. 

To succeed, the government must be bold. An analysis of the causes of Germany’s current recession highlights clear levers for change: lowering energy costs, incentivizing companies to invest, boosting the domestic market, investing in infrastructure, and supporting the industrial sector in its green transition. However, at the same time, reforms must be socially just. A transformation imposed from above will not succeed if ordinary citizens feel they are left to bear its costs. 

The clock is ticking. By 2029, the AfD aims to exploit the people’s economic despair to breach Germany’s democratic firewall. Chancellor Merz’s coalition must prove that democracy can deliver — not just stability, but hope. The fact that Friedrich Merz failed to secure a majority on the first ballot in the Bundestag, a first in the Federal Republic’s history, is hardly a good omen for a coalition already racing against time.