The question of how Europe is faring is fatefully linked to the centre of the continent, Germany. The demonstrative shift in focus of its new chancellor, Friedrich Merz, towards NATO and Berlin’s transatlantic ally, the United States, should not obscure the fact that Europe's largest economy is currently struggling with a multitude of problems at home. However, anyone concerned with Germany's immediate future must analyse precisely these parameters.
“Germany is back on track” – that was Friedrich Merz's message after he had finalised the coalition agreement with the Social Democrats. Merz addressed the US president specifically: Germany would fulfil its obligations in the area of defence policy and would throw its weight behind extending this course to the whole of Europe.
The German Chancellor's inaugural visit to the White House in June was in line with this message. The aim is to intensify cooperation between the Chancellery and the White House, last but not least because of “the deep gratitude to the United States for liberating Germany from Nazi rule 80 years ago”. The fact that the contribution of the Red Army went unmentioned in this context fits in with NATO’s current security doctrine, which Friedrich Merz already made part of his personal agenda in his foreign policy keynote speech in January: Merz left no doubt that there is no better partnership in the world than that between Germany and the US. According to the outcome of the NATO meeting in early June, Germany therefore also intends to take on the second-largest package of military capabilities in the alliance, including an increase in personnel to approximately 460,000 soldiers.
Wrong course set
If the analytical view of Germany's current development was limited to the announcements of the German government on foreign, alliance and security policy, this could quickly lead to misjudgements. It should be noted at the outset that Friedrich Merz sees his office as chancellor as a foreign policy office. He is a staunch “Atlanticist” in that he is oriented towards certain values, such as appreciation for the market economy, liberalism and democracy, and identification with those states that seem to represent these values, above all the US and Great Britain, but also Germany.
However, in order to gain a better understanding of the current situation of Germany, it is necessary to take a broader view and include social and economic developments. Thus, parameters can be identified that will determine Germany's future. This analysis, therefore, traces three paths that, in the author's view, will play a decisive role in shaping the country's development:
a) Fiscal and debt policy
Friedrich Merz is aware that Germany could only achieve NATO's armament targets if the country is prepared to take on extensive new debt. Even while coalition negotiations for a new joint government were still ongoing, the Christian Democrats (CDU/CSU) and the Social Democrats (SPD) introduced a draft law in the German Bundestag that would amend the German Basic Law to allow for the unprecedented taking on of new debt for investment in the military and civil infrastructure.
In the future, federal spending on military defence, civil protection and the intelligence services is to be financed through additional loans. The same applies to military support for Ukraine, which is estimated at four billion euros for 2025, with a further three billion euros planned. However, the fact that Germany could take on around 900 billion euros in new debt has also attracted fierce criticism: if public debt were to rise from 62% to 90% of annual economic output within 10 years, this would entail additional interest payments of between 250 billion and 400 billion euros.
b) Economic and energy policy
The EU sanctions against the Russian Federation have dealt a severe blow to the economies of the European Union, especially that of the Federal Republic of Germany. Rising energy prices have fuelled inflation and thus price increases. Germany is currently experiencing its longest recession in 20 years: the economy contracted in 2024 for the second year in a row, and at best, only slight growth is expected for 2025.
High location costs, especially in the energy sector, a shortage of skilled workers and a tight bureaucratic framework are weakening the competitiveness of Europe's largest economy. Companies in almost all sectors of the economy are reporting a lack of orders. Domestic demand remains subdued despite renewed purchasing power and lower interest rates, as uncertainty about the economic policy course in Germany and the geopolitical environment remains high.
After years of inflation (6.9% in 2022 and 5.9% in 2023), fuelled by sharply rising energy costs due to sanctions against Russia, German citizens are struggling with inflation, austerity measures and uncertainty in the labour market.
c) Social policy
Apart from its high level of debt and misguided economic and energy policies, the Federal Republic of Germany has an Achilles heel that is often overlooked in numerous analyses. For decades, the country has not had a birth rate among the native population that is sufficient to maintain its population. For almost 60 years, Germany's population growth has been driven by immigration and family reunification. The country's high level of prosperity, combined with a well-developed welfare state, is a key factor in attracting migrants. Recent statistical details show that almost a third of the population living in Germany has a migrant background.
Added to this is a continuing deterioration in health, which affects both the native population and migrants alike: two-thirds of adults are overweight, and around a quarter of the population is obese. Over 35% of the adult population has experience with illegal drugs, and almost 30% suffers from mental illness.
The picture of rapidly deteriorating social conditions is rounded off by a look at the German education system: around a quarter of German children cannot read properly at age 10, and the basic school-leaving qualifications of young people are also steadily deteriorating.
Germany is unable to adapt to the learning needs of the 21st century, as has long been the case in Asia and Northern European countries.
Restructure to stabilise
This brings us full circle to the German government's announcements on armament and defence policy: the German Armed Forces currently has around 180,000 active personnel. How is it possible to increase this number to 460,000 when one considers the above-mentioned socio-political developments and the fact that the departure of the “baby boomers” (those born between 1957 and 1969) will result in the loss of a large number of workers from the labour market and also from the German Armed Forces?
How is Germany supposed to remain a stable economic power in Europe if it can no longer secure its energy supply in the truest sense of the word? A country that, in 25 years, will have abandoned 80% of its energy supply from coal and nuclear power and, in addition, will have cut itself off from affordable energy sources through its own economic sanctions, without knowing where and at what price replacements can be found, is destroying its own energy supply.
How can Germany assume a sovereign leadership role in Europe if it is surrendering itself to the dictates of Brussels and the ECB through further debt? Germany's self-imposed limits on government debt, combined with its aversion to monetary financing, have put Europe's largest economy under pressure because it is pursuing contradictory goals: renouncing nuclear energy AND Russian gas; complying with sanctions against Russia while AT THE SAME TIME wanting to remain an export economy.
The reason why we must focus our attention on Germany's future is obvious: if Germany becomes unstable, Europe will tumble. The question of Europe's future is therefore inextricably linked to the centre of the continent. Europe cannot afford to allow its centre, Germany, to become unstable – not at a time when a new multipolar world order is emerging.
It is therefore essential that Germany's leaders concentrate on restructuring the country structurally and macro-economically, thereby stabilising the European centre. This restructuring must include
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investment at the interface between highly developed industry, innovative commerce and skilled services on the one hand, and basic research on the other. Germany has no significant raw material resources, and its primary production is not competitive in the global market. Political and economic forces must therefore focus on Germany's traditional strengths.
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a significant reduction in government spending, primarily through government and administrative reform. Spending on administration, debt servicing, social welfare and indiscriminate subsidies must be completely reformed.
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an end to the ECB's indirect monetary and fiscal redistribution policy. Germany cannot and must not act as paymaster for EU member states and NATO allies in the context of permanent European redistribution as long as it has not itself undergone structural and macroeconomic reform.
Like other European nations, Germany must find its place in order not to be excluded from the new world order. This requires, first and foremost, internal reform and stabilisation, as well as peaceful relations based on partnership and equality with all neighbours on the European continent – including Russia.
Abstract:
The question of how Europe is faring is fatefully linked to the centre of the continent. Europe cannot afford to allow its centre, Germany, to become unstable – not at a time when a new multipolar world order is emerging, whose economic opportunities cannot be controlled by Europe.
German Chancellor Friedrich Merz wants to get his country “back on track”, focusing primarily on foreign, security and defence policy. However, Germany's demonstrative shift towards NATO and its transatlantic ally, the US, should not obscure the fact that Europe's largest economy is currently struggling with a multitude of problems at home.
To gain a better understanding of the current situation in the Federal Republic of Germany, a broader view is needed. It is necessary to include not only longer periods of time in the analysis, but also various social and economic developments. Only in this way is it possible to identify the parameters that will determine Germany's immediate future.
Faulty decisions in financial and debt policy, economic and energy policy, and social and migration policy have plunged the country into a serious crisis. This can already be seen in current economic and population statistics. It is therefore essential that Germany's leaders concentrate on restructuring the country structurally and macro-economically, thereby stabilising the European centre.
