Germany stands on the cusp of significant change as the nation heads to the polls for the parliamentary elections on Sunday, 23 February. The results of this election are poised to shape the future trajectory of the country, with coalition negotiations set to follow immediately after. These discussions will be crucial as they will not only determine the composition of the government but also establish a coalition programme that will guide Germany for the duration of the mandate. The elections come at a critical juncture, with challenges such as rising energy costs, inflation concerns, and public investment issues at the forefront of the national agenda.
The unique German political system requires intricate coalition negotiations post-elections, with a focus on crafting a robust coalition programme. This programme is essential as it sets the legislative agenda and policy direction for the government. The complexity of these negotiations means they could extend over several months, highlighting the importance of consensus-building in German politics.
Energy costs have become a pressing issue for Germany, with prices rising more steeply than in other countries. This trend is contributing to inflation rates that are expected to remain above the 2% target until 2025. Such economic pressures are influencing household confidence and exacerbating financial strain on citizens. The energy producer price in Germany remains significantly higher, at almost 54% above summer 2021 levels, compared to 38% in France and 12% in the United States.
Inflationary pressures are further compounded by Germany's strict fiscal policies, particularly the debt brake rule. This rule, which allows a deficit of between 1 and 2 percentage points per year, is viewed as excessively restrictive given Germany's public debt ratio remains close to 60% of GDP. In contrast, the euro area averages around 90%. Reforming the debt brake could unlock substantial funds, estimated between EUR 30 and 70 billion annually, for public investment and economic revitalization. Public opinion has shifted in favor of this reform, with 55% supporting it in January 2025, up from 31% in July of the previous year.
The withdrawal of aid for electric vehicle purchases by the previous majority has had significant repercussions on Germany's automotive industry. This decision, compounded by a restatement of the debt brake rule by the Constitutional Court in Karlsruhe, led to a dramatic reduction in car production in 2024. Overall, Germany's production capacity has decreased by nearly 6% since 2017, marking the first net capacity decline since the early 1990s.
The upcoming parliamentary elections are seen as a pivotal moment for Germany, with parallels drawn to the historic 1990 election following reunification. The new government will be tasked with addressing neglected public investment needs and revitalizing production capacities. These challenges underscore the importance of effective governance and strategic policymaking in navigating Germany's economic landscape.