After the collapse of the ruling coalition government in Berlin on 7 November 2024, the stage has been set for a snap election on February 23, 2025 in Europe’s most important economy. With a notable rightward shift in European politics and a newly inaugurated EU Commission (and second Trump Administration), will the 2025 German election bring Berlin into global alignment, or will the new Chancellor stick out like a sore thumb?

Why did the coalition collapse?

Disputes over fiscal priorities fractured the coalition. Coalition partners the Social Democratic Party (SPD) and the Greens proposed increasing the deficit in 2025 to fund critical initiatives such as energy price reductions, car industry support, infrastructure investments, and military aid for Ukraine. However, Finance Minister Christian Lindner of the Free Democratic Party (FDP) opposed this plan, citing the need to uphold Germany’s constitutionally enshrined debt brake.

The debt brake, established in 2009, limits Germany’s structural federal deficit to 0.35% of GDP, with exceptions requiring a Bundestag majority. While this rule was suspended in recent years to address the COVID-19 pandemic and war in Ukraine, the FDP resisted further relaxation, advocating instead for tax cuts and reduced social spending. This deadlock ultimately led to the coalition’s collapse.

Reforming the debt brake will require amending Germany’s Basic Law, which demands a two-thirds majority in both the Bundestag and Bundesrat. Polls suggest this threshold could be met with cooperation between the CDU, SPD, and Greens. Although the Greens may not join the new government coalition, their support for reforming fiscal rules could shape the next government’s policies, pushing Merz toward a more centrist position.

What are the polls predicting in the German 2025 federal election?

The collapse of Germany’s coalition government signals a likely shift toward a CDU-led administration following the February elections. Under CDU leader Friedrich Merz, Germany is expected to pivot toward a pro-business agenda that includes tax cuts, deregulation, and infrastructure investment. However, the need for coalition support may temper Merz’s ambitions, with fiscal policy likely becoming more expansionary than in recent decades.

Recent polls have shown the CDU / CSU maintaining a consistent lead at around 32% of the vote, meanwhile the controversial rightwing party AfD, which triumphed in many state elections in September 2024, maintains a strong second position of 19%, behind the SPD which has been governing consistently around 15% for more than a year. Given the unwillingness of major parties to countenance an AfD coalition, Germany could return to ‘grand coalition’ politics with a centrist-focused CDU-SPD alliance.

That is if the two main parties are able to form a coalition without a third or even fourth party. Given the Greens’ growing intransigence and possible irrelevance in European politics, the would seem to be a natural partner, that is their objection to reforming the debt brake can be overcome.

Another third party possibility is the economically left, socially right BSW party, which had an impressive first outing at the polls in 2024, winning over 6% in May’s European elections, and scoring double digits in three state elections in the former GDR. However the BSW’s left-wing populism and full-throated embrace of Vladimir Putin has made them as much of a pariah in the CDU’s coalition calculation as the AfD.

Whatever colour of coalition, the incoming chancellor will face a significant inbox.

The return of Trump and a possible transatlantic trade war

The return of Donald Trump to the US presidency has raised concerns about the potential deterioration of transatlantic ties, a cornerstone of Germany’s foreign policy. President Trump’s prior criticism of NATO’s relevance and pressure on European nations to increase defence spending may reignite debates over Germany’s military investments. While the CDU’s Friedrich Merz supports NATO’s 2% GDP defence spending target, his stance could face resistance from possible coalition partners like the Greens.

Additionally, a protectionist agenda could disrupt German exports, especially in the automotive and industrial sectors. The new chancellor may find themselves focused on revitalising an economy hit by tariffs, potentially ruling out an FDP partnership which refuses to reform the debt brake.

If there is to be a trade war between Europe and the US, mounting economic pressures including low growth, high inflation and labour shortages could see Germany in a uniquely weak position. If the CDU forges ahead with lower taxes and less regulation in a market hammered by tariffs, German exporters might not just face losses but closures. The new government will have to be ideologically flexible enough to manage a possibly volatile international economic future.

Will Germany drop the Greens for good?

The German Green party has long had an outsize influence in federal politics, serving in government for two long stretches from 1998 to 2005, and since 2021 until the collapse of the coalition in late 2024. However at a European level, the Green alliance lost a significant chunk of support in Brussels, dropping about a quarter of their seats to less than 60. Most of those losses came from Germany, where the party’s support nearly halved from 21 to 12.

The French Green list Les Écologistes-Europe Écologie was similarly squeezed between a stronger than expected showing of the centrist bloc under President Macron, alongside the right wing surge of Marine Le Pen. Belgium and Finland also saw drops in their Green seats, while some modest gains were registered in Denmark, Italy and Croatia.

Nevertheless, the impact has been felt in Brussels who have begun shifting away from an overly ambitious green agenda. The European Commission is planning to combine the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the EU Taxonomy regulation into one ‘omnibus’ bill.

On November 8, 2024, European Commission President Ursula von der Leyen unveiled a bold initiative to consolidate the EU’s overlapping ESG reporting frameworks into a single, streamlined regulation. Notably this approach has been welcomed by business, and decried by sustainability and environmental groups.

With an anti-Green agenda in Brussels, the German Greens seem to be in an increasingly precarious position when it comes to coalition politics in Berlin. With Germany’s energy transition becoming a major issue in the election, the CDU under Merz is advocating for reviving nuclear energy and delaying the EU’s 2035 ban on internal combustion engine vehicles, while rolling back stringent renewable energy targets.

The FDP and AfD propose reducing subsidies for renewable energy and scrapping climate measures they view as economically detrimental, such as wind farm expansion. The BSW group has also called out the impact of green policies.

Will there be peace in Ukraine, and will Germany be a part of it?

Germany’s position on the Russia-Ukraine conflict remains a divisive issue in the election. While the SPD and Greens remain committed to supporting Ukraine, including maintaining economic sanctions on Russia, there is growing debate about their long-term effectiveness. Sanctions are claimed to have contributed to higher energy costs and supply chain disruptions, affecting German industries and households.

Meanwhile the AfD have criticized the sanctions as self-defeating, arguing they harm German interests more than Russia’s. The AfD (as well as the BSW) advocate for a reassessment of Germany’s role in the conflict, with the AfD calling for a complete end to sanctions. However as both the AfD and BSW are highly unlikely to enter into a coalition, even harsher sanctions could be on the agenda. The FDP have called for more targeted sanctions on Russian individuals, and the FDP is home to some of Germany’s primary Russian hawks, such as Marie-Agnes Strack-Zimmermann.

However the incoming Trump Administration is expected to take a softer stance towards the Russia-Ukraine war. Although things might not change drastically in the short term, there are voices in the incoming administration keen to start conversations around a ceasefire or even a final settlement to the war in Ukraine.

For Germany and Europe at large, the key question will be how much does Europe want to get involved with a potential peace deal, especially if that includes possible territorial concessions. Discussions in some corners of Trump world have revolved around a possible European peacekeeping force in eastern Ukraine. With Germany’s strong commitment to Ukraine’s territorial integrity and a ‘fight until victory’ mentality, the next German government may find themselves somewhat stuck between the American rock and the Russian hard place.

What next for Germany?

Germany’s 2025 federal election is shaping up to be a referendum on the country’s economic future, climate ambitions, and role in a shifting global order. The incoming Trump administration adds complexity to Germany and Europe’s foreign policy calculus, while debates over sustainability and sanctions reflect deeper divisions within society suddenly facing a populist surge from both the left and right.

For businesses, the election outcome in Europe’s largest economy will have a lasting impact in fields as diverse as sanctions, taxes, protectionism and the stalling green agenda. Will Germany deliver a strongly centrist defence to ideological headwinds, or will a fractured electorate mean that populism will march into the heart of government in Berlin.