Political stability returns, but reforms stall. Following Germany’s general election, major reforms are expected to be delayed due to coalition negotiations and constitutional constraints.
Coalition formation and debt brake pose challenges
Germany is expected to experience greater political stability after the Bundestag elections on February 23, 2025. However, key reforms will likely be postponed due to ongoing coalition talks and the need to amend the debt brake—a constitutional rule limiting new annual borrowing to 0.35% of GDP.
Instead of seven parties, only five are represented in the new Bundestag:
- CDU/CSU (Union) – The conservative bloc and election winner
- SPD – Social Democratic Party of Germany
- Greens
- The Left
- AfD (Alternative for Germany) – The far-right party
The liberal Free Democratic Party (FDP), which was responsible for the collapse of the coalition last year, failed to reach the five per cent hurdle.
Before the election, the CDU/CSU, under the likely future chancellor Friedrich Merz, ruled out a mathematically possible coalition with the AfD. This means that a two-party alliance between the CDU/CSU and SPD remains the only option – with or without the participation of the Greens.
The political uncertainty caused by the difficulties and the end of the previous coalition between the SPD, Greens and FDP has put additional pressure on the German economy, which has been in recession since 2018. Coface’s Economic Policy Uncertainty Index for Germany has risen in this context, and a quick coalition formation is necessary for this to fall again. The exploratory talks resumes on 2 March.
Key Economic and Fiscal Challenges
The clock is ticking on many issues: taxes, high energy costs and a lack of investment in digitalization, education and infrastructure. Most of the important measures will not be possible without a change to the debt brake enshrined in the German constitution. However, for this to happen, the CDU/CSU must secure a two-thirds majority with the three left-wing parties in the Bundestag.
Military spending is also likely to increase following the announced withdrawal of the USA from its involvement in Ukraine and NATO. The assessment is that the sooner military spending is removed from the debt brake, the better the chances of an agreement. Nevertheless, the negotiations on the measures will take some time. Our economists do not expect any major reform before well into the second half of 2025.
Germany’s Country Risk Rating
Germany's country risk is currently rated A3 by Coface. This means, the macroeconomic and financial outlook is considered less favorable, but the climate and sovereign risks are still satisfactory.
The Country & Sector Risks Handbook for the year 2025 provides further details on the risk profile of Germany and almost 160 other countries, including:
- Country Risk Assessments
- Business climate evaluations
- Sector Risk Assessments
- Possible default rates of the companies
The publication is available free of charge and is intended to support decision-makers in adopting the right strategies and avoiding risks before they materialize as credit losses.