The economy is sending a warning to German parties to sit down and negotiate as soon as possible

The German economy is in palliative care. Economic data continue to send signals to the parties to sit down and negotiate as soon as possible in order to get the country out of the economic quagmire. At the moment there are no fixed timetables, only short messages between the CDU and SPD through the media. The winner of the elections and candidate for chancellor, Friederich Merz (CDU), announced on Monday that talks will take place "in the next few days", but without specifying a timetable.

But the truth is that the first message came on election night, when he said in his address to the party members from the headquarters of the conservative party that "the world is not waiting for us (...) it is not waiting for us to have long negotiations." For their part, his Social Democrat colleagues left the ball in his court. The co-chairman of the SPD, Lars Klingbeil, said that the initiative for negotiations "lies with him - Merz."

While this political tennis match is taking place in Germany, data continue to emerge that increasingly confirm the need to take the bull by the horns and start working to revive the country's economy. The latest was the confirmation that growth in the last quarter of 2024 fell by 0.2% , a downward revision made by the Federal Statistical Office (Destatis).

The agency attributes this poor performance to a "significant reduction" in exports, while there was an increase in private and public consumption, the former benefiting from higher wages.

Between October and December 2024, exports fell by 2.2% compared to the previous three months. This is the largest drop since the second quarter of 2020, in the midst of the Covid pandemic. This tremendous collapse is a hard blow to an economy whose growth is based precisely on exports.

The Bundestag (Central Bank) also issued a report on Monday in which it offered a small ray of hope, as it assured that the country's economy could "grow slightly" at the beginning of the year, but stressed that this stagnation of the economy will continue. Growth forecasts for 2025 have already been revised downwards by all public and private analysts, who place it in the range of 0.3% to 0.5%.

Finally, the latest economic indicator that this week served to confirm the paralysis of the German economy was the business confidence indicator prepared by the Munich-based Ifo economic research institute, which closed February at 85.2 points , compared to 85.1 in the first month of the year.

German business leaders are very pessimistic about their assessment of the current situation. The index for this component fell by one point compared to the previous month, to 85 in February . However, expectations have improved somewhat, as the elections already marked a shift towards the conservative right after the vote on Sunday. Specifically, the index rose from 84.3 points in January to 85.4 in February.

In a study carried out by researchers from the Real Istituto Elcano, Pablo del Almo and Miguel Otero, they speak of the "seven evils" of the German economy and one of them has to do with "its dependence on the export sector." The experts point out that "whenever the world economy, and especially the major economies - China and the USA - grow less, Germany suffers.

In this regard, they reiterate that "Germany is immersed in a deep identity crisis. The open and liberal world that has been key to its economic miracle is crumbling and possible US tariffs, Russian aggression in Ukraine and growing competition from China scare many Germans" and the grand coalition will have to face this in order to find a solution.

The two major parties will have to work hard and quickly to reach a consensus and solve these "ills" that make Germany "the sick man of Europe ." Time is totally against them.

ComerzBank chief economist Joerg Kraemer predicts that the future coalition will likely "agree on more funding for infrastructure, which is good for business." But he warns that the parties have different views on many other areas of economic policy, such as tax, social and climate policy. "This clouds the prospect of a real reset of economic policy, which would be urgently needed after five years of stagnation," he reiterates.

Looking at the "seven evils" facing the German economy and the political parties' ideas, one can see where there will be more friction and where consensus will prevail.

During the campaign there was much talk about curbing and modifying debt. This harshness in financial policy was precisely what hampered private and public investment.

"During the long years of Angela Merkel's reign, which were marked by the euro crisis, Germany was growing and the obsession was to reduce debt in order to be an example for the rest of Europe," explain the experts at Elcano.

As a result, there has been a lack of investment in infrastructure and digitalisation. It is very difficult to pay by credit card in the country, trains are delayed and "even bridges collapse," they say.

Pablo del Almo and Miguel Otero's solution to this problem is clear: "Eliminate the debt brake included in the Constitution."

This is where the first point of conflict between the major parties begins. The Social Democrats, led by Olaf Scholz, are in favour of reforming the debt brake, giving the country greater flexibility when it comes to borrowing.

The Social Democrat proposes an expansionary fiscal plan for 2025, taking advantage of Germany's low public debt and deficit, with the aim of boosting annual economic growth to 2%. This plan includes significant investments in infrastructure and in the transition to a greener economy, as well as increased taxes on high incomes and corporate profits.

Merz, for his part, flirted with the idea of ​​making such a reform, but "as long as the funds are used for essential investments and not for current expenditure or social transfers." Here there could be a meeting point between the two, except for the cuts in social spending proposed by the conservative, especially for migrants. The Christian Democrat's growth objective is the same as Schozl's, 2%, but through different channels.

Merz's fiscal key is to reduce corporate taxes, such as the corporate tax from 40% to 25% , as well as tax incentives for investment in technology and clean energy. Therefore, both leaders will clash on tax issues towards large companies.

However, despite the common points, both parties will have to seek the support of two-thirds of the most fragmented Bundestag in the country's history , which could make it impossible to open such a constitutional reform. The cordon sanitaire would prevent them from agreeing anything with the far-right AfD, and the "neo-communists" of Die Linke will ask for concessions more geared towards increasing social spending and raising taxes on high incomes and the profits of large corporations.

The fact that the invasion of Ukraine has put an end to cheap Russian gas has dealt a severe blow to the industry. In the short-term measures, both parties agree on lowering electricity taxes and grid charges. At the same time, they are planning an investment programme in renewable energy , which could also help the Greens to support the constitutional reform.

However, the two parties differ on the issue of nuclear energy. While Merz is in favour of heavy investment in nuclear power, Scholz shut down the last three operating plants in April 2023, following the plan of his predecessor, Angela Merkel. This is where they will find points of friction – including with the Greens.

Germany's efficiency "is drowning in red tape and bureaucracy," say the experts at Elcano. The excess of red tape is due to "the desire to avoid spending, abuse of power, corruption and bad practices," they explain. This problem can be remedied if, precisely, public spending is relaxed, since reducing bureaucracy requires investment.

In September 2024, during Scholz's term in office, the Bundestag approved a package of measures proposed by his government, aimed at simplifying administrative procedures for businesses and citizens, with an estimated saving of almost 1 billion euros per year.

The Social Democrat showed his commitment to this issue and Merz reiterated that bureaucratic simplification was among his priorities to "encourage investment", which is why he promised the creation of a Ministry of Digital Affairs to provide companies with the necessary tools and thus streamline bureaucratic procedures.

Merz also promised to scrap the law on corporate due diligence in supply chains, which aims to "strengthen respect for human rights and environmental standards in global supply chains."

But the latter is a completely electoral promise and an attempt to please the German business sector, which complained about the extra costs of auditing all the companies that distributed to them. The European Parliament approved a directive similar to the German one in mid-2024, which is binding on all EU countries, so it will not be able to repeal this legislative framework.

At this point, friction will be minimal and progress seems quite clear in this regard.

The Bundesbank representative in Spain, Fabian Huttner, said in his opening speech at the 2nd Bundesbank Forum , held in the middle of this month, that Germany's labour potential, i.e. the total number of people available in the labour market, "will begin to decline noticeably from 2026 onwards. This will further aggravate the shortage of qualified labour in Germany."

More than a fifth of the population is 65 years old and the pension replacement rate in relation to wages is less than 50%, "when in Spain it is around 80%, which leads to the average German saving more than the average in the EU and, logically, also consuming less, which reinforces the dependence on the foreign sector," warn the experts from Elcano.

Merz's proposed measures include tax exemptions for overtime work and encouraging work beyond the age of 65, the legal retirement age in Germany.

During his term in office, Scholz reformed the pension system, creating a capitalisation fund to financially support the pension system and keep it at 48% of the average salary until 2040. Investment in this fund is expected to increase pension spending by 32 billion euros by 2045.

Merz and his conservative group were highly critical of the reform known as the 'Rentenpaket II'. They argued that these measures could increase the financial burden on future generations and questioned the intergenerational nature of the reform. Therefore, the reform of the pension system as well as social policies are expected to be hot topics at the meeting.

The vast majority of German companies claim to be suffering from a shortage of qualified workers. It is true that demand for qualified workers has fallen due to the economic crisis and the lack of recruitment in the industrial sector, but little has changed.

The solution to this problem, say Pablo del Almo and Miguel Otero, is to "orient the educational system towards these shortcomings and increase immigration – and not just qualified immigration – although the current context in Germany is not very favourable in this respect."

Merz made it clear during his campaign that he would focus his efforts on stopping illegal immigration and reducing the number of refugees , as well as cutting social payments for these two segments of the population.

Olaf Scholz, for his part, defended in his electoral programme a migration policy that advocates "security, legality and respect for human rights" as opposed to the more restrictive proposals defended by Merz.

There is clearly another major debate here that will have to be resolved within the coalition. But experts are sceptical: "The question is whether Germany can create legal immigration channels that meet its employment needs and whether German society can assimilate such integration."

ING's Global Head of Macro, Carsten Brzeski, said in a report that coalition negotiations are going to be "extremely complicated." But the parties will have to get to work quickly. The negotiations that took place between the political forces after the 2021 elections lasted about two and a half months. It was the longest negotiation period in the country's recent history, although at that time there were three parties aspiring to form a government, not two.