John Ryan
This article forms part of our series on perspectives from across UCL and beyond on the changing geopolitical order, and the implications for Europe, the European Union and the EU-UK relationship. Find more articles here.
The surge of the radical right populist Alternative for Germany (AfD) to second place in the recent federal election grabbed the headlines in Germany and beyond. It follows a broader political shift in the EU. Increased success of populist parties at the ballot box is changing the EU’s outlook on many policy fronts. More quietly, the CDU’s victory in the election in what remains of the mainstream has significant ramifications domestically, across Europe and beyond. Multiple foreign policy challenges, from the war in Ukraine to the relationship with China, are straining the bloc’s ability to respond. So, what next for Germany and Europe?
While fragmentation of the contemporary world order is largely viewed through the lens of the US-China rivalry, the role of Europe – the EU, and the EU-US relationship is now in question. Speeches at the Munich Security Conference by US officials show that it is time for a reality check. An accelerated and substantive policy change in Germany and Europe needs to happen. President Donald Trump’s transactional approach is leading to tectonic shifts in security, trade and political relationships.
The contrast between the US’s willingness and ability to act, and Europe’s misalignment on foreign policy and lack of investment in defence capability, is stark. Making the concept of EU strategic autonomy a reality requires practical action. The is unlikely to be driven by France: President Emmanuel Macron faces a divided parliament with no majority and is severely weakened after the last parliamentary election. It is more likely to come from Germany under the newly formed CDU/CSU-SPD coalition led by Chancellor Friedrich Merz.
Since the end of the Cold War, Europeans have become increasingly incapable of acting on the security front, while the US feels less and less like it should be responsible for Europe’s security. Under Joe Biden’s administration, there was a willingness and forbearance to keep the transatlantic partnership with Europe intact. This has now fundamentally changed, for example with President Trump’s unilateral approaches to trade, relations with Russia and the resolution of the Ukraine conflict. Germany is starting to embrace the realities of the Trump presidency.
The new German government coalition will have to deal with Germany’s export machine, which is stumbling and residential construction which has slowed, while businesses complain about excessive energy costs, rising regulatory burdens and pervasive policy uncertainty. Under pressure from all sides, Germany is once again the “sick man of Europe,” according to Hans-Werner Sinn, president emeritus at the Ifo Institute. Those challenges have served to benefit populist right-wing parties, particularly the Alternative für Deutschland (AfD).
Germany’s exports are exposed to systemic downtrends in the global economy. But how sick is the German economy really? Is it a mistake to distinguish between short-term gyrations caused by shocks or falls in global demand and the longer-run trend shaped by domestic supply-side policies? The negative US, China, and Russian geoeconomic trends are making a German recovery difficult.
While the German economy is often portrayed as slow to adapt, it has a proven track record of adapting quickly to large market and policy shifts. Before the Russian attack on Ukraine, Germany was heavily reliant on Russian gas and since then has made the necessary investments and built infrastructure quickly and decisively to change its supply routes and sources. It has caused much disruption to industry, but it has happened. Another example is reforming the economy to support the historic unification of the East and the West. Germany was able of dealing with those challenges dynamically.
The German economic downturn as we see it today, however, is not a regular market cycle adjustment. The geopolitical awakening brought by Zeitenwende extends to challenges of an economic transition due to deindustrialization from the Russian and Chinese dependencies, as well as the fallout from the pandemic and climate change. This restructuring effort will have to happen in a uniquely complex environment of more expensive energy, de-risking economic relations with China and US and a more effective digitalization strategy and a gradual shift to green energy.
Germany’s need to evolve and modernize must also be placed in context. The EU has pursued a complex three-dimensional approach with China: as a partner in many different areas of global economic governance, as a competitor in all economic sectors, and as a systemic rival, because of the difference in political systems. This approach has created complications internally and in relations with the US.
President Macron and previous Chancellor Olaf Scholz emerged weakened from regional and European Parliament elections. Their ability to steer policy at home and in Europe was severely compromised. This frailty infected all areas of policy, including how Europe manages its increasingly strained relationships with China, the US, and the war in Ukraine.
Germany, for its part, had a prolonged period of political inertia as Scholz’s SPD coalition with the Greens and liberal FDP became more unpopular after suffering heavy losses in three regional elections in September 2024 in Eastern Germany. The coalition collapsed, and the governing parties suffered a very bad result in the national election on 23 February 2025.
Chancellor Friedrich Merz is proposing a simple short-term European strategy for Ukraine, such as the provision of missiles and drones. While simultaneously strengthening Germany’s, this initiative may result in real economic growth. Germany will have to work with France, Poland, and the UK to create a new reliable European Security core with an effective European defence industry. After the Merkel/Scholz years, at least Merz is trying to address the problem of German security and economic decline. Timing and effective use of investment funds will be critical, while the margin for error is slim.
The German economy is projected to hardly grow for the next two or three years while inflation will be strong, and a global trade war is looming. With the amendments to Basic Law, however, the new coalition parties have — at least — created the necessary financing basis for themselves.
Chancellor Merz challenges include the lack of voter confidence, which a poll in April suggested 60 percent of Germans think Merz is unsuitable as Chancellor. The fact that Merz required a second round of voting in the Bundestag to be confirmed as Chancellor on 6 May does not augur well. Germany’s economic weakness will have to be Merz’s main priority. Merz will need to pursue a fundamental reform of its economic model by strengthening domestic demand and hoping for growing demand in Europe. This will be a difficult task because of increased friction in trade between China and the US, and war in Europe has not only re-drawn strategic lines and trade flows. Complex sanctions and an increasing weaponization of trade tariffs will also have a lasting impact on the German economy.
John Ryan is a Network Research Fellow at CESifo, Munich. He was previously a Fellow at LSE IDEAS at the London School of Economics and Political Science.
Note: The views expressed in this post are those of the author, and not of the UCL European Institute, nor of UCL.
Featured Image: Hamburg from above by Thies Meyer via Unsplash
