Germany’s Coalition Collapsed, but Recession Is Here to Stay
German chancellor Olaf Scholz has dismissed his finance minister, Christian Lindner, pitching the country toward elections. Economic woes will be at the center of the campaign — yet proposals for a break with austerity are are conspicuously absent.
German chancellor Olaf Scholz, whose coalition recently splintered, gives a statement to the media on November 6, 2024, in Berlin, Germany. (Sean Gallup / Getty Images)
“Scholz ditches Lindner.” Three words that pack a punch for Germans, after three years in which Free Democrats (FDP) leader Christian Lindner set an austerian tone for the coalition government. The split between Chancellor Olaf Scholz and Finance Minister Lindner has other momentous consequences: a paralyzed government, a looming confidence vote, and fresh elections, indeed in the middle of an economic crisis. The situation for the economy and households is set to get even worse. For there is no end in sight to Germany’s recession — and with Donald Trump elected just the day before this government crisis, new trade wars are on the horizon.
The so-called traffic light coalition — until this week made up of Scholz’s Social Democrats (SPD), the Greens, and the smaller FDP — has been undermined by the same thing that doomed it from the start: the state of the public finances. The debt brake (a 2009 constitutional amendment that limits government deficits to a tiny 0.35 percent) remained in place even under this self-styled “progressive” administration, and there were no tax increases for billionaires to help steady the ship.
In the beginning, the coalition could get around the debt brake using various tricks. But with the heightening crisis, a ruling by the Federal Constitutional Court last November, and the ongoing recession, the noose tightened further. The government became practically unable to act. It could only take new initiatives that cost nothing and could generate tax revenue — for example, the incentives used to motivate pensioners or part-time workers to return to work or work more. The result: all of the coalition parties had to forget about most of the promises they had made to voters before their election in fall 2021. The results are also miserable — the project for cost-of-living benefits known as Bürgergeld (literally “citizens’ income”) is full of holes, the economy is faltering, infrastructure is crumbling, and child benefit plans have been postponed. At the same time, the three ruling parties’ poll ratings have each continued to fall — to the benefit of the conservative and far-right opposition.
Debt Brake
The crisis culminated in a prolonged recession — and papers by the SPD, Vice Chancellor Robert Habeck of the Greens, and Lindner, each explaining what they would like to do, but which was supposedly impossible in the coalition. With a little political will, the coalition could probably have found a compromise to stay in power. But according to Chancellor Scholz, Lindner was unwilling to make a deal, despite the far-reaching concessions he had offered.
Sacking his finance minister, Scholz said, “I see no other way than to take this step to avert damage to our country.” This was surely a strong statement: if you hadn’t heard about Scholz’s record, you might think he was really a social democrat. The Greens did what was expected of them: in response to Trump’s election, they called for more financial support for Ukraine.
A few minutes later, Christian Lindner tried to flip the blame: the chancellor had made the ultimate demand that the debt brake be suspended, which would mean opening up the prospect of more government borrowing. Lindner said that he could not have accepted this without violating his oath of office. “The key sentence in Lindner’s statement was factually, simply — almost touchingly — wrong,” the economist Jens Suedekum rightly surmised. Lindner then suggested to Scholz that they together head down the path of new elections. But Scholz dismissed him. That had all been planned — as can be seen, Lindner believes, from the fact of the chancellor’s prepared statement and its timing.
On these grounds, Scholz should reap the advantage of having seized the political initiative. Whoever shows some backbone first is more likely to be rewarded by voters, though this may not be enough.
According to Scholz’s plan, the federal parliament (Bundestag) should hold a vote of confidence in his minority government on January 15. If he loses — as he surely expects, as he now counts on the support of the SPD and Greens alone — new elections must take place, presumably in March. According to Scholz, before Christmas the Bundestag should pass laws such as adjusting tax brackets for high earners to cope with inflation and providing corporate tax relief. These are remarkable priorities, when in his statement breaking with Lindner, the Chancellor accused him only of thinking about the rich.
Now Jörg Kuckies, who was previously state secretary in the chancellery, is to take over as finance minister. He has been an SPD member since his late teens — but was also head of Goldman Sachs’s Frankfurt office for almost a decade. He repeatedly expressed great public interest in multibillion-euro industrial subsidies, which he certainly helped negotiate. He is the first economist to hold the office of finance minister in over a decade — and also the first unable to rely on a majority in the Bundestag.
Economic Campaign
The next six months are likely to continue as badly as before for Europe’s biggest economy. Any legislative initiative requires either a majority including Lindner’s FDP (which is hardly conceivable) or a majority with the Christian Democrats (only possible if it is neoliberal in intent). The Christian Democrats are also facing a dilemma between showing “responsibility” or else pushing Scholz for early elections. They have already announced both, but explicitly ruled out support for a Scholz budget.
This situation will likely continue until at least spring, and in the worst case until next fall. In plain language, this means at least another six months of economic crisis — and massive uncertainty for all concerned. Companies will postpone investments and citizens will use up their nest eggs. In the worst case, incoming president Trump will introduce further tariffs against the European Union in January. This likely points to soaring unemployment and turbo-deindustrialization, if the government remains paralyzed.
This also means that the next federal election campaign, whenever it comes in 2025, will surely be fought over economic woes. In principle, this is a good starting point for the Left to push an economic populist message. But left-wing party Die Linke lacks the people for this — economic policy has always had a hard time gaining traction in the party, and with the departure of Fabio De Masi (to join Sahra Wagenknecht’s party, BSW) and the death last year of Axel Troost, it has lost its last leading economists. The BSW does have economists, but it is little interested in defending a distinct working-class standpoint. Having one is vital if the Left is to change Germany’s current course.