Merz at Scholz: First discussions on the future government, with the thorn in the side of the GDP

The winner of the German elections Friedrich Merz was received by Federal Chancellor Olaf Scholz this morning. Brief conversation to discuss the transition phase. Two other issues under discussion: the start of exploratory talks with the Social Democrats to define a governing coalition and also the possibility of reconvening the parliament in its old composition before the natural deadline to approve important budget measures that require a qualified majority, in particular a new tied fund for Ukraine and defense spending are discussed.

Friedrich Merz, chairman of the CDU and winner of the German elections, gave a short statement, accompanied by CSU chairman Marku Söder, before bringing together the MPs of the two parties. Merz confirmed the start of talks with the Social Democrats to define a government agreement and indicated three priorities: defense, immigration and the economy. "We have to make decisions very quickly, so we need a government as soon as possible. We can define a good coalition agreement with the Social Democrats in a reasonable time to have the government by Easter." Söder confirmed that the MPs will now elect the leader of the conservatives so that he has full authority to lead the talks with the Social Democrats. Merz also wanted to point out that the electoral reform that had an impact on these elections has created many problems that will have to be solved, "this must be part of the agreement on which the future coalition is based."

Incumbent Chancellor Merz has begun talks with the Social Democrats to approve an extraordinary 200 billion euros ($220 billion) in defense spending. The CDU and SPD are discussing ways to circumvent Germany's tight restrictions on government borrowing to free up resources for its crumbling military infrastructure and vote on a new package that would double the amount approved three years ago, a source told Bloomberg. Merz promised during the election campaign to increase military spending in Germany to counter the Russian threat, but his plans are now at risk from the election result with the AfD gaining traction. With less than two-thirds of parliament, the CDU and SPD do not have the votes to ease the crisis of constitutional limits on government debt. But they could get around that by pushing for a vote before the new legislature, which meets for the first time on March 24. Merz is under pressure to move quickly on defense with the rest of the European Union struggling to respond to Donald Trump's determination for a quick solution to the war in Ukraine.

Germany's GDP fell in the last three months of 2024

Germany's gross domestic product in the fourth quarter of 2024 fell by 0.4% compared to a year earlier and by 0.2% compared to the previous three months. Both final figures are in line with expectations, as is the adjusted final GDP, which fell by 0.2% compared to the same period in 2023.

The Federal Statistical Office reports that Germany's deficit for 2024 is 118.8 billion euros, thus exceeding the deficit recorded for 2023 by 15 billion. In relation to GDP, the deficit is 2.8% (2023: 2.5%). While the federation has managed to reduce its deficit, a significant increase is recorded in the Bundeslaender, the federal states: compared to 2023, the deficit has tripled (from 9 to 27 billion euros). The municipal deficit has also increased by 7.6 billion. While tax revenues increased by 3.5% in 2024, expenditures are growing more significantly (+5.3%), as are interest expenses.