German firms demand stability and swift action on growth

Germany's economy has been struggling for more than two years, entering a likely third year of recession in 2025 after gross domestic product in Europe's largest economy shrunk 0.2% and 0.3% in 2024 and 2023 respectively.

Against the backdrop of a dire economic situation, the previous ruling three-party coalition of Chancellor Olaf Scholz was voted out of office in Sunday's general election and his conservative challenger Friedrich Merz is set to take over the reins of power. Merz's alliance of Christian Democratic Union (CDU)and its Bavarian sister party, the Christian Social Union (CSU), won 28.5% of the vote, with Scholz's Social Democrats coming in at just 16.4%.

The two parties are likely to form the next government after Merz ruled out seeking an alliance with the far-right AfD — the second-strongest party in the new parliament with 20.8% — and the CSU wants to avoid a coalition with the environmentalist Greens, whose support dropped to 11.6%.

Stable government a priority for businesses

The German business community may be relieved by the election outcome. The Cologne-based Institute for Economic Research (IW) found in a pre-election study that most firms considered a coalition with the far-right AfD as "highly problematic for the German economy."

After months of uncertainty following the previous government's collapse, businesses now want political stability and a government that is capable of pushing through urgently needed reforms, including pro-growth policies.

"Given the enormous challenges, it is good for Germany as a business location that the CDU and SPD have, albeit by a slim margin, a majority," IW's Knut Bergmann told DW.

'Continuation of stagnation'

However, Alexander Kritikos, a board member of the German Institute for Economic Research (DIW), sees the election outcome differently.

"In a grand coalition, I ultimately see a continuation of the stagnation that Germany experienced during [former chancellor] Angela Merkel's 16 years in office," he told DW, noting how the CDU/CSU/SPD failed to create huge economic dynamism during the 12 years they ruled together during Merkel's reign. Even during the four years when the CDU governed with the liberal Free Democrats (FDP) there was little economic dynamism. "I would have expected a greater willingness to reform from a black-green coalition," said Kritikos, referring to the CDU's black party colors.

Rainer Dulger, president of the German Employers Federation (BDA), also wished for a different outcome, telling German business daily Handelsblatt that a coalition of conservatives and the pro-business FDP would have best sharpened the government's focus on restoring Germany's competitiveness.

Shift to extreme parties threatens to upset key reform

The rise of Germany's extremist fringes further complicates reform of a key element of German politics: the so-called debt brake which limits fresh borrowing to just 0.35% of GDP annually. It was enshrined in the constitution to keep German debt low, but is said to have hindered urgently needed public investments.

IW's Bergmann also said that it's particularly problematic as mainstream parties no longer hold the two-thirds majority in the new parliament needed to amend the constitution to reform the debt brake or pass special funds.

In addition, the massive gains of the AfD, which has doubled its result compared with the 2021 election, is worrying business leaders as they fear negative consequences when recruiting urgently needed foreign workers.

DIW's Kritikos thinks the AfD's rhetoric could foster a "more racist atmosphere against foreigners."

A recent IW survey bears out his comments, as almost half of Germany's business associations have reported difficulties in their sectors in attracting foreign workers to regions where the AfD is strongest.

Also, a nationwide survey conducted in March 2024 by the German Center for Integration and Migration Research (DeZIM) found that nearly one in ten people with a migration background is seriously considering leaving Germany due to the AfD's advance.

Elias Steinhilper, a researcher at DeZIM, believes the study was "not just a snapshot." Pointing to the fallout of the AfD's gains in recent elections and anti-foreigner sentiment in the election campaign, he told DW that this is likely to encourage even more people withmigration backgrounds to consider leaving Germany.

Business demands for the new government

Marie-Christine Ostermann, the head of an association representing Germany's many family-owned businesses, now hopes that extremist parties will "lose influence" as parties in the political center "address the country's challenges."

"We need a stable coalition and the ability to act quickly, as deindustrialization in Germany is in full swing," she told DW.

The list of demands from business leaders is long. They are calling for cuts to bureaucracy, tax reforms, more investment in infrastructure, an acceleration of digitalization, better education, and migration policy, as well as managing trade conflicts and securing affordable energy for the country.

Kritikos also advocates for more honesty in the political realm, especially regarding the demographic upheaval facing Germany. "Due to demographic change, there are only two options: If we want better infrastructure, we must either work longer or finance it through debt," he said.

And Jochen Stanzl, financial analyst at CMC Markets says the most demanding task would be to come to terms with the return of US President Donald Trump and possible looming trade conflicts. "Because any prolonged situation where Trump threatens and there's no clear answer from Berlin will dampen the mood on the trading floor."

Friedrich Merz has expressed his hope that a new government will be in place by around the Easter holidays.

This article was originally written in German.