Short Cut Re-Live: 'Will a black-red coalition under Merz bring recovery?'

After the election, everything points to Germany soon being governed by a black-red coalition under Friedrich Merz. What are the chances of economic improvement? Will tax cuts for all, as intended by the CDU, really help? Or would targeted investment bonuses be better? And who will pay for this? What are the chances of a reform of the debt brake – and an end to austerity, which has contributed greatly to the recession?

We discussed these questions in our New Economy Short Cut “Will a black-red coalition under Merz bring recovery?” with Dominika Langenmayr, Professor of Economics at the KU Eichstätt-Ingolstadt, Sebastian Dullien, Scientific Director of the IMK, Holger Schmieding, Chief Economist at Berenberg Bank, and Philipp Heimberger, economist at the Vienna Institute for International Economic Studies on Friday, 28 February.

Dominika Langenmayr opened the discussion and began by addressing the question of feasibility: She sees little chance of reforming the debt brake given the majority in the new Bundestag. She believes that there is more chance of a special fund being set up again, which could also be decided with the existing Bundestag. Sebastian Dullien, on the other hand, argued that he had political concerns if major measures were initiated with the majorities of the old Bundestag that lacks a mandate to do so.

From there, the discussants turned their attention to possible economic policy measures to initiate the “upswing” that gave the debate its title. The discussion reflected how the discourse has shifted in recent years: Although the four panelists represented very different economic positions, they all agreed that the state needs more scope for investment – whether through a reform of the debt brake or special funds. The urgency of the tasks was simply too great not to spend more money.

Still, there was disagreement about which economic stimulus measures are also necessary to generate growth. Dominika Langenmayr and Holger Schmieding were very much in favor of a permanent reduction in corporation tax. Both formulated the need to send positive, investment-friendly signals to German companies. According to Schmieding, this would work best with permanent tax cuts rather than temporary write-offs or investment incentives. Philipp Heimberger, on the other hand, argued that a reduction in corporation tax would fuel tax-cutting competition in Europe and favored investment measures that strengthen domestic demand.

This brought up the last and most fundamental point of the discussion: What’s next for Germany’s business model in an increasingly rough geopolitical situation? Heimberger believes that the export-oriented economic model, which has long guaranteed German prosperity, has come to an end: The country can no longer build its success on huge trade surpluses, but must find ways to strengthen the domestic market, invest in infrastructure, boost wage growth and consumption. This would also strengthen Germany’s independence from the situation on the global markets at a time when we do not know what will happen with Trump’s tariff policy or how the Chinese market will develop.

Holger Schmieding weight in – he warned against hastily burying the German business model, as Germany had always done well with it. Now it is more a matter of putting companies back in a position to survive on international markets with a supply-oriented policy. Strengthening resilience was also Sebastian Dullien’s final point when he raised the question of whether Germany and Europe were really prepared for the geopolitical challenges, and not just in the narrower economic policy sense. For example, he cited the lack of its own satellite infrastructure as a point where Europe is completely dependent on the USA.

Is this raising unrealistic expectations? It was Langenmayr who again raised the question of feasibility at the end: Can Germany even arm itself against the adversities of the global market on its own? She expressed skepticism and called for realism. To a certain extent, we will always be dependent on what is decided in Washington and Beijing. What the discussion showed is that although economic policy has always been geopolitics, this has probably not been as obvious for a long time as it is today. Germany and its economy have to fight for a new position in a changed world situation. It will be interesting to see whether the new coalition succeeds in doing so.

You can find the event recording in German below – English subtitles to follow soon.