35 years after fall of the Berlin Wall, Germany is in a funk that might engulf Europe

Ordinarily, Saturday’s 35th anniversary of the fall of the Berlin Wall might have been expected to be a cause for much joy in Germany. However, celebrations of the milestone will for many people be subdued given the nation’s deep economic and political funk.

This was most recently illustrated by the collapse on Wednesday of the three-way governing coalition that included the left-of-center Social Democratic Party (the SPD), the Greens and the liberal Free Democratic Party.

Chancellor Olaf Scholz fired Finance Minister Christian Lindner, leader of the FDP, declaring that there was no longer any “basis of trust” between them. Scholz, who is leader of the SPD, said he would seek a vote of confidence by Jan. 15 so that MPs “can decide whether to clear the way for early elections.” These could take place as soon as March, six months earlier than scheduled.

Beneath this governmental instability there lies a deeper issue: the breakdown of the traditional duopoly of power between the SPD and the Christian Democratic Union/Christian Social Union.

These parties have been the twin pillars of German politics since the end of the Second World War. But with the SPD now very unpopular and the direction of the CDU/CSU still uncertain since the end of Angela Merkel’s long chancellorship between 2005 and 2021, Germany appears to be moving from de facto two-party politics to a multiparty system. This is illustrated by the growing number of smaller parties that previously functioned as subsidiaries of either the SPD or the CDU/CSU.

One of the drivers of this unraveling of traditional German politics and the fracturing of the political landscape has been the fact that the nation’s post-war consensus is eroding on multiple issues, including history, geopolitics, the economy and ethics.

These political fractures might mean politics is becoming more generally unstable and less predictable, with significant challenges each election cycle in establishing a governing coalition. So there might be more rotation of ruling coalitions, with all the problems this can bring including, potentially, the prospect of the role of the chancellorship becoming weaker in patchwork governments.

For much of the 35 years since the fall of the Berlin Wall, many Germans have been mostly content with their post-Cold War lot, seeing themselves in general as beneficiaries of globalization. This might be changing, as evidenced by the rise of smaller parties.

The far right Alternative for Deutschland is currently running second in the polls, for instance. It was the first far-right group to gain seats in the Bundestag, the German federal parliament, for six decades. Moreover, in September the party won its first state election, in Thuringia.

The AfD campaigns extensively on immigration, an issue that has grown significantly in salience in Germany in recent years. This is in part because of the integration of more than 1 million Ukrainian refugees since the Russian invasion in 2022, and the arrival of about 1 million migrants, largely from the Middle East, in 2015 and 2016.

Certainly, Germany has long had the largest economy in the region and is the most powerful nation in the EU, yet it is flatlining

Andrew Hammond

This political malaise is mirrored on the economic front. The fall of the Berlin Wall hastened the end of Soviet Communism and led to the reunification of Germany, but the nation has more recently been given the moniker of the “sick man of Europe.”

Certainly, Germany has long had the largest economy in the region and is the most powerful nation in the EU, yet it is flatlining. The country has been in a state of ferment now for many years, exacerbated by the pandemic and the energy shocks that followed the Russian invasion of Ukraine. Economically, the latest data shows that Germany very narrowly avoided a recession in the third quarter of this year but is still struggling after shrinking last year, with the International Monetary Fund forecasting zero growth in 2024.

The challenges the country faces are exemplified by Volkswagen, which has experienced a sharp fall in profits and might decide to close several factories for the first time in its almost 90-year history. Operating profits for the nine months to the end of September fell by more than a fifth compared with the same period a year ago to just under €13 billion ($14 billion), the causes of which included weaker demand from China. The company’s problems reflect a wider malaise in the automotive industry, which is Germany’s single largest business sector.

With economic confidence weak, there has also been the biggest reduction in employment for about half a decade, according to an S&P Global and Hamburg Commercial Bank index.

In addition, the Federation of German Industries has warned that a fifth of the country’s industrial output might be at risk between now and 2030. This is not only because of weaker export markets for German goods (exports account for nearly half of the nation’s gross domestic product, a higher proportion than many other major economies) but also high energy costs.

One worrying sign of the declining economic confidence might be German birth rates, which have gone into decline after rising before the pandemic. Between 2011 and 2016, the birth rate rose from 1.38 to 1.59 children per woman. However, it had fallen to only 1.35 in 2023.

To rub salt into the wounds, the nation’s troubled public finances could soon become much worse as a result of a Federal Constitutional Court decision that might reduce tax income by up to €75 billion. The court case concerns the legality of a so-called “solidarity surcharge” that was introduced to tackle the burden of German reunification. Reportedly at risk is about €66 billion collected since 2020, and approximately €9 billion in interest. If the court rules against the government on this, it will blow a huge hole in public finances.

All of this explains why the nation might now be at a historic crossroads. The danger is that it might result in a significantly weaker Germany, and wider EU, at a time of growing global geopolitical flux and economic uncertainty.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics