Chart of the Week: Germany’s perfect storm

Germany is set to hold snap elections on 23 February 2025, in an effort to establish a stable government following the collapse of Chancellor Olaf Scholz’s three-party coalition on 6 November. The political discord is the culmination of a series of adverse economic shocks to Germany – an economy that not so long ago prospered on the back of abundant energy, and a benign, pro-trade international political environment. Germany’s misfortunes began with post-pandemic inflation, and were heightened by the impact of the Russo-Ukrainian conflict on energy prices, for a manufacturing sector previously dependant on Russian gas. Add to this the effects on trade of intensifying competition from China and the United States, and then on 6 November the re-election of Donald Trump on a platform of higher tariffs, and the net result has been a perfect storm for Germany’s leaders. The immediate trigger for the collapse of the German government was a disagreement over fiscal policy among coalition members. The date of the snap elections was announced on 12 November, and the ensuing climate of uncertainty pushed Bund yields — until recently a safe haven — up relative not only to France, but also to Spain and Italy, the largest euro area periphery countries. Germany’s troubles are set to have wider European impact, as they create a leadership vacuum at the heart of the European Union just as it seeks to formulate a united response to President-elect Trump on issues ranging from Russia’s war in Ukraine to the future of the US-led NATO alliance.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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