Felix Feather, Economist at abrdn, comments;
“Sunday’s elections will very likely result in a change of government, with CDU leader Friedrich Merz the probable incoming chancellor. He will inherit an economic model based on manufacturing-intensive, export-led growth that is under pressure on multiple fronts. Structural economic headwinds have pushed down on potential growth. This is particularly difficult to deal with because the usual levers of fiscal and monetary stimulus are ineffective.
The necessary structural reforms are often challenging because they may clash with broader social preferences, entrenched interests, and existing political settlements.
Given the depth of challenges Germany faces, both the private and public sectors will need to play a significant role in boosting investment.
Merz proposes to encourage private investment by cutting income and corporate taxes and deregulating the economy.
These reforms could indeed push up on private investment, though households may choose to use the proceeds of lower income taxes to increase consumption instead.
On the public side, Germany’s debt brake, which limits the federal government’s deficit-to-GDP ratio to 0.35% per year, makes expanding investment difficult.
Merz has said he is open to debt break reform, while the SPD and Greens both supported reform while in government. But, as the debt brake was brought in via a constitutional amendment, reform would require a two-thirds supermajority in the Bundestag.
On balance, we continue to think that Germany’s long-term growth prospects are among the worst in the Eurozone. But there is low-hanging fruit to be picked via the right structural reforms, and even partial implementation of these measures could lead us to revise our expectations higher.”
