The Guardian view on Germany under Merz: Europe’s powerhouse is still struggling | Editorial
In recent months, Europe has faced renewed economic uncertainty, particularly as Germany grapples with the implications of Donald Trump’s political maneuvers and intensified competition from China. Last March, the financial markets in major European cities like Paris, Milan, and Berlin experienced a surge of optimism following a significant agreement led by Friedrich Merz, the then-chancellor-elect of Germany. This deal aimed to relax constitutional spending constraints, which many believed would provide the necessary fiscal stimulus to revitalize a stagnating economy and counterbalance geopolitical challenges posed by the shifting dynamics between the US and China. The hope was that Merz’s leadership would usher in a new era of economic growth, marked by ambitious plans for defense spending and substantial investments in infrastructure and green initiatives.
However, just six months into Merz’s tenure, that optimism has begun to wane. Recent downgrades in growth forecasts for 2026 to below 1% have sparked concern among economists and business leaders alike, revealing a stark contrast to the initial exuberance. The chancellor’s strategy, which included a commitment to high levels of defense spending in anticipation of a less reliable US partnership, has not yet translated into the expected economic revival. Instead, business confidence has taken a hit, with murmurs of dissent emerging within the government as the country faces what many fear could be a fourth consecutive year of economic stagnation. This situation illustrates the challenges of relying on traditional economic orthodoxies to address complex and evolving geopolitical realities, suggesting that innovative approaches may be necessary to navigate the formidable headwinds posed by both domestic and international pressures. As Europe seeks to redefine its economic landscape, the interplay between fiscal policy, defense spending, and international relations will be critical in determining its future trajectory.
Donald Trump’s trade wars and Chinese competition constitute formidable headwinds. But old economic orthodoxies are not the answer
Last March, following angst-ridden months as Europe came to terms with Donald Trump’s return to the White House, financial markets in Paris, Milan and Berlin were gripped by a
surge
of optimism. The cause was a historic deal brokered by Friedrich Merz, then Germany’s chancellor-elect, which loosened constitutional spending constraints in the EU’s powerhouse nation. Here at last, it was hoped, was the fiscal kickstart required to end a prolonged period of economic stagnation, and mitigate geopolitical headwinds blowing from the US and China.
Six months into Mr Merz’s premiership, the angst is back and there are the first murmurings of rebellion. The chancellor’s plan included “whatever it takes” levels of defence spending, designed to prepare Germany for a changed era in which the US was no longer a dependable ally, and a huge €500bn investment in infrastructure and the green transition. But last week, the chancellor’s team of economic advisers
downgraded
growth forecasts for 2026 to below 1%. And ahead of what would constitute a fourth year of near-flatlining, business
confidence
has slumped.
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