Can Merz survive the (latest) coalition from Hell?

The serial travails of the dying Macron presidency may be dominating the headlines, but the profound dysfunction of Germany’s coalition government holds its own perils for Europe. Although Germany has much greater fiscal headroom than France, it too has an unsustainable welfare state. Chancellor Merz admits as much, yet, shackled to an unhappy agreement with the Social Democrats, he is unable to do much about it. The controversial Bürgergeld scheme introduced in 2023 by then Chancellor Olaf Scholz pays monthly stipends to roughly 5.5 million, of which fully 4.5 million are able-bodied, and 47 per cent of whom are not German citizens. In an agreement hailed as a “breakthrough” this week, Merz and the Social Democrats agreed that any recipient failing to make three consecutive meetings with the unemployment office would lose all benefits. This paltry requirement does little to compel the able-bodied back into the workforce compared to a strict time limit on benefits, and encourages long-term dependence on state benefits. For a country facing a demographic crisis as the boomers continue to retire, paying for millions not to work is economically catastrophic.

Former businessman Merz can see the depressing maths confronting Germany. The massive defence and infrastructure debts incurred at the outset of his chancellorship may not count against formal debt limits, but must still be repaid by German taxpayers. Ongoing support for Ukraine and the enormous annual sums paid by Berlin to keep the EU afloat threaten to crowd out the discretionary cash Germany has employed to paper over disputes at home and across Europe. Generous state retirement benefits are a primary driver of government spending, but trimming them will generate a political backlash from pensioners who don’t have the tax-deferred savings accounts popular elsewhere. To his credit, Merz is sounding the alarm well before Germany faces the fiscal calamity that threatens to wreck France’s Fifth Republic. But unless the SPD embraces cuts to social programmes, his plans to avoid a similar fate remain hostage to coalition politics.

It is a political truism that only the Left can reform social welfare programmes. Bill Clinton imposed work requirements on welfare recipients; Gerhard Schroeder imposed the Harz reforms that restored German labour competitiveness. But once out of power, or confined to a junior coalition role, the Left finds its purpose in defending social programmes from miserly conservatives. The SPD agreed to consider welfare reforms as part of the coalition agreement struck with the Christian Democrats, but now see blocking such reforms as the only means to revive their flagging party fortunes.

If debate were solely about spending, the coalition could likely find a workable compromise, given the fiscal rectitude deeply embedded in German politics. But budget fights have become a proxy for the political threats faced by the traditional centrist parties beset by populists on their political flanks. The Social Democrats have lost the educated Wessi bourgeoisie to the Greens, while Sahra Wageknecht is making a play for their blue collar supporters. The CDU is haemorrhaging support to the Alternative for Germany (AfD) over its failure to revive the economy or take stronger action on immigration.

The centrists are suffering from their joint status as an amorphous “uniparty.” Successive coalitions have obscured any salient political differences between them. Gerhard Schroder imposed neo-liberal reforms as leader of the Social Democrats while Christian Democrat Angela Merkel co-opted the welfare and environmental policies previously owned by the Left. The net result is two parties with few political differences, offering only dilute political identities that fail to inspire voters not actually on party payrolls. The economic stagnation facing the country demands aggressive, disruptive reforms that the centrist parties cannot muster the courage to propose, lest they give ammunition to upstart parties that threaten to displace them.

Looming over all these calculations is the immigration debate. While nearly every member of the Bundestag knows that the vast majority of migrants who have arrived in the past decade have no legitimate claim to political asylum, successive governments have been incapable of either reducing the benefits attracting them, or deporting significant numbers out of the country. Public handwringing over European law frustrates an electorate that has seen millions of migrants easily hurdle the legal obstacles to their entry. Many young male migrants show less interest in acquiring job skills than in preying upon women and the law-abiding, leading many to prefer the emotional appeals of the populists to the ongoing vacillations of the uniparty.

Consider a counter-factual: Recall that the Social Democrats brought the radical Greens into government and transformed them into a normal political party. Had the Christian Democrats forged a coalition with the AfD after the February elections, it would have held a strong mandate to deal with the migration issue through expedited deportations, tougher asylum standards, and a tight linkage between social benefits and demonstrated commitment to assimilation for recent arrivals. In short, the exact sort of policies embraced by the Danish Social Democrats, who curiously don’t seem to find the strictures of EU law insurmountable. In exchange for a hard line on migration, a confident CDU could have extracted a commitment to dramatic spending reforms.

Instead, the firewall against the AfD was nothing less than a public declaration of fear, a thinly veiled panic by the uniparty over the prospect of explaining why its long dominance of German politics should continue. Taming the AfD in a coalition while ousting its nastier characters would have been the obvious move for a CDU confident in its platform and history. Instead, the CDU retreated into a timid alliance with the wounded Social Democrats, and forfeited its best chance of defusing the most divisive issue in German politics.

Germany’s traditional centre will only retain its dominant position if its constituent parties can satisfy their voters by refashioning the economy for the new world it faces. Expensive energy, declining export markets, and the decline of globalism into trading blocs each pose dire threats to the German industrial model. Tacking on an additional visit to the unemployment office is laughable short of the scale of reforms needed to ensure the country’s prosperity. The clock is already ticking on this inept coalition government. If Merz cannot muster the capacity to implement dramatic reforms, the voters may replace him with someone far less acceptable to the comfortable denizens of the uniparty.