Germany’s “business model is gone”, warns Friedrich Merz
IT IS A calm and confident Friedrich Merz who greets The Economist on February 7th at a luxury golf resort in Stromberg, a small town in Germany’s Rhineland where he will campaign later in the day. Two weeks ago controversy exploded around the leader of the conservative Christian Democratic Union (CDU), after he relied on the hard-right Alternative for Germany (AfD) to get a non-binding motion urging restrictions on migration through parliament. Hundreds of thousands took to the streets in protest. But the row does not appear to have fazed the man hoping to become chancellor after the election on February 23rd. Getting migration and the economy right are essential, he tells us, if the AfD is to be kept out of power.
Mr Merz is very tall, thin and has a no-nonsense rhetorical style worlds apart from Olaf Scholz, the incumbent he hopes to unseat. His energetic campaign performances belie his 69 years. Polls suggest that the AfD controversy has not derailed his goal of a solid victory for the CDU and its Bavarian sister party, the Christian Social Union (CSU). If so, Mr Merz will have first dibs on the chancellery.
For worried observers, Europe risks being left behind as China and America race ahead in innovative industries like AI. Mr Merz insists that Germany has no choice but to change. “The business model of this country is gone,” he states bluntly. His response begins with a war on red tape. “We have to do serious work on this burden of bureaucracy,” he says, blaming Brussels as well as Berlin. Asked for examples, Mr Merz rattles off a list of troublesome EU rules, including the due-diligence reporting standards that German business leaders loathe.
Second, Mr Merz will take an axe to the benefits system. “We have to concentrate our public spending”, he says, “on not paying people who are not willing to work.” On energy, another bugbear for German industry, he promises grid reform and “to build at least 50 gas power plants”. There will be no return to Russian gas “for the time being”, but Mr Merz is “absolutely” open to signing long-term contracts for (pricey) American liquefied natural gas. New nuclear reactors will be considered.
Mr Merz also wants to slash taxes and raise defence spending. Pressed on whether his sums add up, he appeals vaguely to the revenues from the growth he hopes to inspire (Germany has been in recession for two years), and says that “there is a lot of room for changes” in the €460bn ($474bn) federal budget. But many think the gap between aspiration and reality, including Germany’s vast public-investment needs, means the constitutional debt brake, which limits the federal government’s structural deficit to 0.35% of GDP, must be relaxed. “I’m open to discuss that,” says Mr Merz. “But it is not our first approach.”
For the fiscal hawks of the CDU/CSU, reforming the debt brake would be a big step. But elsewhere Mr Merz hardly comes across as radical. “German industry is still strong,” he insists. Despite the world’s protectionist turn, and the prospect of tariffs from America, he insists that Germany’s export-led model can “definitely” survive.
Although he seems uncomfortable with the word “leadership”, Mr Merz is serious about restoring energy to Germany’s European policymaking, something other governments have missed under Mr Scholz. Strengthening the EU’s voice is a leitmotif of the Merz worldview, stretching from China policy to his support for Emmanuel Macron’s ambitions to bolster Europe’s defence industry. Mr Merz promises to energise the “Weimar triangle” with France and Poland, musing on military co-operation as well as joint projects in AI and quantum computing. He can imagine working very closely with Giorgia Meloni, Italy’s right-wing prime minister.
More fundamentally, Mr Merz supports a “concentric circles” idea of organising Europe in which some countries integrate deeply while others share less sovereignty and receive fewer benefits from the single market. “To be completely in or completely out is not the right answer,” he says, referring to Britain’s link to the EU. Greater concessions should have been made on the free movement of people to avoid Brexit, he believes.
As for Donald Trump, Mr Merz claims the American president’s transparent approach means preparing to negotiate with him will be “very easy…‘America first’ means that he is committed to do the best things for his own country.” Brussels should meet America’s promised tariffs on EU exports as it did during Mr Trump’s first term in 2018, Mr Merz says, with a targeted response that inflicts sufficient pain to concentrate minds.
On defence spending, mindful that simply meeting the NATO floor of 2% of GDP will be tricky enough once a special fund expires in 2028, he hesitates to commit to higher numbers, though accepts “it has to be more” in the long term. And if America insists that he moves more quickly? “It is not my task to make President Trump happy,” Mr Merz snaps. Meanwhile, calls from EU partners for tweaks to fiscal rules to enable higher defence spending, or even joint borrowing, will get short shrift in a Merz chancellery. “I’m very sceptical about that,” he says. Changing the EU treaties is “extremely complicated, and I don’t see it in the foreseeable future”.
An early test for Mr Merz may be American demands that Europe should take the lead on security guarantees for Ukraine if peace talks, announced by Mr Trump on February 12th, succeed. At the Munich Security Conference this weekend he will meet American officials who want their European counterparts to take on more responsibility, including J.D. Vance, the vice-president. Peter Hegseth, Mr Trump’s defence secretary, said on February 12th that “America will no longer tolerate an imbalanced relationship which encourages dependency.” But the hawkish Mr Merz, who once said “Peace can be found in any cemetery; only if there is freedom will there be peace,” has yielded to a more cautious chancellor-in-waiting.
Sending peacekeeping troops to Ukraine “could be an option”, he says, but “only after a reliable ceasefire”. As for the security guarantees Volodymyr Zelensky demands, “a country at war is not a potential NATO member”. Pressed, Mr Merz concedes he would eventually like to see Ukraine as “a country in peace in NATO”, but adds it is too early to consider admitting a country without full control over its territory—at least until America has clarified its policy. Mr Merz does, though, look favourably on American proposals to use frozen Russian assets to aid Ukraine.
Mr Merz’s hesitancy is understandable. He has an election to win, and the constituency in Germany for fiscal splurges and placing troops in harm’s way is limited. Yet even his stated proposals show flaws. The border controls and rejections of asylum-seekers he demands sit awkwardly with his professed pro-Europeanism; existing controls have already upset relations with Poland. Meanwhile, Mr Merz backs EU proposals to ease the flow of capital across the single market while rejecting what he calls the “extremely unfriendly” proposed takeover by Italy’s UniCredit of Commerzbank, one of Germany’s biggest lenders.
Defence of national champions aside, Mr Merz’s zest for injecting America-style red-blooded capitalism into Germany’s dozier model is genuine. He remains at ease in the world of boardrooms he inhabited in his decade in the private sector, notably as the chairman of the German arm of BlackRock, an asset manager. Acquaintances from that time, during which he became a multi-millionaire, speak of his quick-wittedness and leadership qualities.
He has certainly demonstrated resilience. Mr Merz quit politics in the 2000s after Angela Merkel bested him in a CDU power struggle. But in 2018, when she resigned the party leadership, Mr Merz shocked the political world by placing his hat in the ring. That bid failed, as did a second two years later. He got there in the end. Yet there remains frustration at his inability to seal the deal. Many think the CDU/CSU should be polling higher than its current 30%, given the travails of Mr Scholz’s outgoing government. Mr Merz struggles with women and younger voters. And although his pledge never to enter coalitions with the AfD is serious, less than half of German voters believe it.
As his opponents like to point out, Mr Merz has never run anything larger than the CDU’s parliamentary bloc. But the tests will come quickly. He will need to woo either the Social Democrats or Greens (or both) into coalition talks, which he says he hopes to finish by Easter (April 20th). His team is frantically preparing a list of early actions to prove to cynical Germans that politics can still get things done. G7 and NATO summits follow in June.
Mr Merz ends with a stark vision of Germany’s future. Fixing the economy and immigration, he says, will shrink the AfD—ideally below the 5% level needed to enter parliament. Fail, and a darker future awaits. “This could be one of our last opportunities to resolve the problems before the populists [win] a majority,” Mr Merz warns. The German republic has long been one of Europe’s strongest bulwarks against the far right. To some, Mr Merz’s actions have weakened that firewall. To the man likely to take over the reins of Europe’s largest economy, he represents its last chance. ■
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