Germany’s European Chancellor

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

Many Germans are expressing buyers’ remorse. Coalition talks with the Social Democrats have successfully concluded, yet so far the head of the German Christian Democrats, Friedrich Merz, has failed to convince a majority of Germans he will be up to the job as chancellor. Opinion polls paint a grim picture. Right-wing populism is still on the rise.

Souring sentiment has much to do with a widespread German angst, of economic decline, Russia, Trump, and even the future of democracy.

But in part, the skepticism stems from a belief that Merz is a man from a different era trying to fix Germany’s problems with a box full of rusty, old tools. Many are convinced he is giving up on his conservative principles of fiscal orthodoxy. They fear he will quickly become like his predecessors Olaf Scholz or even Angela Merkel. A moderator rather than a leader.

That is not what most economists, international investors, and European partners see. Mario Draghi, the former head of the European Central Bank and arguably one of the strongest advocates for a quantum leap in European integration, called Merz’s changes to the German debt brake a potential game changer. He is only one of many international observers who think the incoming chancellor has recognized his country needs to invest in its own defense and stimulate the economy if it seriously intends to rearm and overcome a growth slump that has slowed down Germany since 2019. Draghi also issued a warning, however. According to him, if Europe is to benefit from the German decision, the European Commission needs to play its part. “If this is not properly managed,” Draghi recently said, “what happens is that Germany will rearm itself but the others would not.”

But defense spending is only one challenge. Strengthening the economic resilience of the whole of Europe is equally important as it is also about ensuring a better balance of power within the EU. The bloc can ill afford a weak Germany at its center. But equally problematic is a German revival that could make the country too powerful relative to its neighbors. One of the lessons of the euro crisis was that at the time the perception of German ‘Überpower’ greatly exacerbated centrifugal forces within the bloc. Ultimately one of the goals of the new German government will be to avoid the fragmentation of the continent, spur more integration, and finally allow Europe to act and speak as one. Thus, defense spending is only part of a broader agenda, that also includes ways to make the German export-dependent economic model more able to absorb the potential and likely shock of a dramatic retreat of globalization. The only way to do it is to strengthen Germany’s domestic, European market, and its 500 million customers.

This is where the old-fashioned political instincts of Merz could prove to be useful. Politically, he grew up in the 1990s. Helmut Kohl, chancellor of German unification and one of the founding fathers of the common European currency, was at the helm of his country and of the CDU of then-young politician Merz. Merz’s European credentials are rooted in those formative years. Herein lie both his strength and potential political weakness.

Merz’s focus on the international stage will risk making him look aloof and distant from his citizens’ day-to-day concerns.

Strength because he recognizes that the export-driven German economy is more vulnerable if not shielded by a strong Europe. He understands the importance of reconciling German and European interests and will instinctively try to work with his main continental partners, first and foremost France, and the European Commission. Having accepted the need to relax fiscal rules in Germany, Merz will soon face the need to break a few German taboos at the European level on common spending, by allowing the commission to be equipped with additional financial firepower, and by accelerating the removal of residual barriers to the single market, perhaps even in areas in which Germany has been more reluctant to engage constructively with its continental partners, such as banking.

So far, there is still little to suggest a quantum leap on realizing a real savings and investment union, with a fully integrated capital market and a true banking union. In their coalition agreement, the CDU/CSU and SPD prefer to endorse lofty high-level goals, which say little about the concrete steps they are willing to take. In recent months Merz has often made positive references to the Draghi and Letta reports with their proposals to make Europe more competitive and complete its single market. Since reducing internal barriers could more than offset any negative impact of U.S. tariffs, at least according to the International Monetary Fund, removing them and unlocking private capital could indeed represent the two keys to fire up a sputtering European economic engine. Many economists think that a better integration of the bloc’s financial sector is the only way to spur the wave of investments Europe so badly needs to catch up with other economies. The European Commission has recently issued a communication on the savings and investment union with a timeline for various legislative steps it intends to undertake. Germany will be asked to show its negotiating hand quickly as Brussels tries to act with a greater sense of urgency. How far will the new government be willing to go? It is too soon to tell.

Perhaps easier to understand is what the German coalition agreement says about the need to enhance the commission’s own financial firepower. Here the future government seems to endorse the need to increase Brussels’ own resources, in other words, its ability to raise revenue and thus better respond to economic shocks. Predictably, there is less German enthusiasm for new debt-financed pots of money. But the future government coalition is careful not to draw any red lines. It merely expresses the desire they should remain the exception. The same applies to the possible relaxation of new European fiscal rules that only recently came into force and are already coming under strain because of defense spending needs and the potential impact of tariffs on national budgets.

Merz seems to be genuinely determined to demonstrate he is a more enthusiastic European than his immediate predecessors. He correctly wants to make sure Germany contributes to mold the changes that are taking place in Europe and globally. But herein also lies his weakness. His focus on the international stage will risk making him look aloof and distant from his citizens’ day-to-day concerns. Wary German public opinion has not yet fully metabolized the need for breaking taboos, domestically or in Brussels. As long as Merz’s willingness to think outside of his own ideological party box is mistaken for political weakness, the new government will receive more praise abroad than at home. As a result, Merz will have a much harder time convincing its own citizens that Germany is back on track.