Germany's Olaf Scholz's coalition collapses – so what now?

German Chancellor Olaf Scholz attends a session on November 13, 2024

(Image credit: JOHN MACDOUGALL/AFP via Getty Images)

German chancellor Olaf Scholz has “just pulled the plug on his coalition and lost his parliamentary majority”, with polls implying that his Social Democrat party will be defeated in the snap election called for 23 February, says Guy Chazan in the Financial Times. The current government will be put to a confidence vote on 16 December, which it is expected to lose.

Despite Scholz’s low approval ratings and the wish of some in the SPD that he be replaced by the popular defence minister Boris Pistorius as SPD leader, party leaders have “rallied round” and most expect Scholz to be the name on next year’s ballot. His standing among some colleagues has “paradoxically improved” since the government’s collapse – he has been hailed as a hero who “finally lanced the boil, ending a dysfunctional government riven by ideological conflict”. Scholz fired finance minister Christian Lindner, leader of the pro-business Free Democrats (FDP), for refusing to suspend the debt brake to allow more funding for Ukraine, effectively ejecting the party from the coalition.

How does Olaf Scholz's decision impact Germany?

Donald Trump’s victory couldn’t have come at a worse time, says The Times. His plans to impose more tariffs on imported European goods are likely to be “particularly catastrophic for Germany” since America is its largest trading partner. Trump has suggested tariffs may be between 10% and 20%, possibly much higher for cars, Germany’s main export. The EU may respond in kind. The German Economic Institute estimates that a trade war could cost Germany €120 billion-€180 billion over Trump’s four-year term. Then there’s a possible Putin victory in Ukraine, “with all that this implies for the survival of the EU”, says Ambrose Evans-Pritchard in The Telegraph.

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Last year, the US had a $170 billion trade deficit with the EU; Germany accounted for half of that. This “touches on a deeper problem”. The country has relied on a current-account surplus of 6%-8% of GDP for much of the past 20 years, the result of a “tax and regulatory structure, allied to fiscal ideology, that suppresses internal consumption and wages to the benefit of the exporting elites”. A large surplus would normally partially self-correct via the exchange rate, but Germany “jammed the adjustment mechanism by launching the euro”, leading Washington to accuse Berlin of “gaming monetary union to lock in a stealth devaluation”.

Germany’s “original sin” was a collective refusal by elites to embrace modern technologies, says Wolfgang Munchau in The Times. As time went on, leaders “continued to double down”, with a heavy dependence on a few industries such as cars and chemicals and increasing reliance on Russia for gas and China for exports. The “neo-mercantilists in the government” turned a “bad bet by a single industry” – the car industry’s refusal to embrace the rise of EVs – into a “bad bet for the whole country”. Industrial production has fallen back to 2006 levels this year; the economy as a whole has seen virtually no growth since 2018. Unless Germany repeals its constitutional debt brake and starts to generate some domestic demand, it will “sink into atrophy”, says Evans-Pritchard. “The last chicken has come home to roost.”

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Emily has worked as a journalist for more than thirty years and was formerly Assistant Editor of MoneyWeek, which she helped launch in 2000. Prior to this, she was Deputy Features Editor of The Times and a Commissioning Editor for The Independent on Sunday and The Daily Telegraph. She has written for most of the national newspapers including The Times, the Daily and Sunday Telegraph, The Evening Standard and The Daily Mail, She interviewed celebrities weekly for The Sunday Telegraph and wrote a regular column for The Evening Standard. As Political Editor of MoneyWeek, Emily has covered subjects from Brexit to the Gaza war.

Aside from her writing, Emily trained as Nutritional Therapist following her son's diagnosis with Type 1 diabetes in 2011 and now works as a practitioner for Nature Doc, offering one-to-one consultations and running workshops in Oxfordshire.