Political Crisis in Germany

In November 2023, the ruling coalition government in Germany collapsed. The coalition, formed in 2021, included three parties: the Social Democrats (SPD), the Greens, and the Free Democrats (FDP).

Reasons for Collapse

• The immediate cause of the collapse was the firing of the Finance Minister from the FDP by the Chancellor, who is from the SPD. This led to a breakdown in cooperation between the coalition partners, as disagreements over key policy issues intensified.
• Key Disagreements:
  • Debt and Spending: The core disagreement between the SPD/Greens and the FDP was over government spending. The SPD and Greens wanted to increase state spending, particularly in areas like climate initiatives and defense, which would require borrowing. In contrast, the FDP insisted on strict adherence to Germany’s "debt brake" rule, which limits borrowing.
  • Debt Brake Rule: Germany’s debt brake rule, enshrined in its Constitution, restricts government borrowing to just 35% of GDP. This rule was introduced after the 2008 financial crisis to prevent excessive borrowing. The FDP, supporting fiscal discipline, resisted proposals for more borrowing, while the SPD and Greens pushed for higher spending.
  • Tax Cuts and Austerity: The FDP also advocated for tax cuts for the wealthy and austerity measures, which were opposed by the SPD and Greens.

Constitutional Crisis and Budget Issues:

• To work around the debt brake, Germany uses special off-budget funds for urgent financial needs, such as the climate transformation fund and the defense fund. However, the coalition’s use of these funds faced legal challenges.
• In November 2023, Germany's constitutional court ruled that transferring unused pandemic-era debt into these funds was unconstitutional. This ruling further complicated the government’s budget and deepened the conflict within the coalition.

Snap Elections and Political Instability:

• As the coalition became increasingly dysfunctional, the Chancellor agreed to hold snap elections on February 23, 2025, well ahead of the original elections scheduled for September 2025.
• A no-confidence motion is set to be introduced on December 16, 2023, which the government is likely to lose due to the lack of support from the FDP.

Key Issues Facing Germany:

• The immediate future of Germany’s political landscape is uncertain, with the rise of far-right politics and a fractured ruling coalition.
• The country faces significant challenges, including dealing with an energy crisis exacerbated by the war in Ukraine and managing rising public dissatisfaction with political instability.
• Germany’s economy was expected to shrink by 0.2% this year. This is a downgrade from the 0.3% growth that was expected in April 2024, making Germany the only G-7 country to contract in 2024. This follows the predictions from major economic institutions in Germany.