Friedrich Merz: Economists warn of economic risks after election defeat

The surprising failure of CDU leader Friedrich Merz (69) to become chancellor is causing considerable unrest in business and politics. Leading economists view the narrow vote as a warning signal for Germany as a business location. They fear that political uncertainty and the narrow majority in the Bundestag could hamper necessary reforms and further weaken confidence in a stable, predictable economic policy.

"The fact that Merz has now failed in the first round of voting sends a devastating signal to society and the economy: The ranks are not closed," Düsseldorf professor Jens Südekum told the Reuters news agency on Tuesday. Crossfire can also be expected in the future when it comes to sensitive issues. "The business location and the entire country need one thing above all else – a stable government that pursues predictable policies," Südekum said.

DIW President Marcel Fratzscher takes a similar view. "Merz's election defeat underscores how far apart the CDU/CSU and SPD are politically and that the coalition agreement is met with deep rejection by many members of parliament," the head of the German Institute for Economic Research told Reuters. "The coalition agreement contains unusually few binding agreements and leaves many of the major issues – from tax reform and pension reform to migration – open."

One conclusion of the election defeat is that the CDU/CSU and SPD urgently need more courage to implement fundamental reforms and changes. The coalition agreement is not a good basis for governing in the coming years.

"The events in the German Bundestag today are a bombshell, and it is a bad day for Germany and Europe," says Carsten Roemheld , capital markets strategist at Fidelity International. Due to the premature collapse of the traffic light government, many months have already passed without Europe's largest economy being able to act politically. "If this stalemate continues, the political and economic consequences are unforeseeable," he says. With regard to the capital markets, one thing is clear: "There is nothing the markets abhor more than uncertainty, and the DAX has already reacted accordingly. If Germany remains leaderless for the longer term, negative consequences for the business location can be expected."

According to Commerzbank Chief Economist Jörg Krämer , the voting blunder is a reminder that a future coalition government with a conservative and left-leaning coalition can only rely on a narrow majority. "This is a difficult environment for economic policy reforms," ​​Krämer said. "We still don't expect a genuine reboot in economic policy, which would be necessary after the long-term erosion of the quality of business locations."

The Association of Young Entrepreneurs calls this a fatal signal. "In times of economic uncertainty, growing bureaucracy, international competition for locations, and international wars and conflicts, Germany needs reliable leadership," says association head Thomas Hoppe . "Party political intrigues endanger our country's prosperity, increase political disenchantment, and fuel the fire of extremists in the country."

The digital association Bitkom calls it a low point in the history of the Bundestag if parliament cannot agree on a new government at this stage. "It's true: Members of Parliament are only accountable to their conscience. But it's also true: In this time of profound upheaval, our country needs a stable, strong government, and Europe needs leadership," says Bitkom President Ralf Wintergerst . The vacuum now created is damaging Germany and destroying trust in the functioning of democracy.

ING chief economist Carsten Brzeski emphasized that Merz's defeat "is a sign for foreign investors that not everyone is aware of the current situation and urgency."

Alexander Krüger , chief economist at Hauck Aufhäuser Lampe, also emphasizes the international perspective on Germany. He believes that the failure to elect Friedrich Merz sends a disastrous message internationally. "The signal is that Germany can no longer even elect a government," he says. "The economy is stagnating anyway, and structural reforms are long overdue. Ultimately, too many parties are pulling in different directions. Instead of showing the necessary strength, Germany is once again showing weakness," the economist says. This bodes poorly for future negotiations with the USA and in the Ukraine conflict. "Germany will continue to act from a position of weakness internationally for a long time to come," Krüger says.

Cyrus de la Rubia , Chief Economist at Hamburg Commercial Bank, doesn't want to paint a bleak picture. "The lack of votes for Friedrich Merz's election can certainly be seen as a foretaste of the challenging task of governing that the CDU/CSU and SPD will have to face. But we shouldn't overdramatize the situation," he says. After all, the coalition agreement included many sensible measures, and the parties have approved these plans.

"It can therefore be assumed that a large portion of these measures will be implemented in the coming months and years," he says. However, hopes that the starting signal would finally be given to quickly get the country back on track have not yet been fulfilled. "This is annoying, but will likely only have a short-term impact on sentiment and will dissipate at the latest when the first economic policy measures are finally decided and implemented," the economist says.