Across the Pond: Is Germany’s chancellor-in-waiting Merz the comeback kid?
Mar 6, 2025
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Paul Donovan, Chief Economist for UBS GWM, dives into Germany's political and economic landscape, focusing on chancellor-in-waiting Friedrich Merz's push for independence from the U.S. and plans for increased defense and infrastructure spending. The discussion highlights the surprising resilience of Germany's DAX index amid geopolitical tensions and examines consumer confidence despite recent economic challenges. Donovan also explores broader Eurozone dynamics and the potential impact of demographic trends on Europe's economic future.
Friedrich Merz's commitment to increased defense and infrastructure spending highlights Germany's shift towards greater autonomy from the U.S. amidst geopolitical uncertainties.
Despite long-term challenges like aging populations, the rise in domestic consumer spending and technological advancements may enhance Europe's economic recovery and overall quality of life.
Deep dives
Implications of the German Elections
The recent German elections are poised to bring significant changes as they likely result in a grand coalition government, where the social democrats transition to a junior partner role under the more conservative Christian Democrats. This shift aligns with a broader global trend of incumbents being ousted and reflects potential uncertainty regarding established political norms. The implications of this change may resonate beyond Germany, especially with Friedrich Mertz's emphasis on seeking greater independence from the United States and responding to perceived neglect. Such a stance is expected to influence Germany's defense spending and infrastructure development, marking a considerable pivot for the historically frugal nation.
Shifts in Defense Spending and Economic Confidence
A notable aspect of the incoming government’s agenda is an increase in defense spending, which signals a broader shift in Europe toward enhancing domestic defense capabilities, potentially favoring European contractors over U.S. manufacturers. This move stems from a recognition that the U.S. may not remain a dependable ally, further strengthened by recent geopolitical events like the Russian invasion of Ukraine. While this shift is anticipated to provide a much-needed fiscal stimulus for European economies, it is also seen as a measure to boost confidence within Germany’s consumer base and broader economic landscape. As consumer spending shows resilience despite external economic pressures, a focus on European-sourced defense initiatives may provide additional support to economic growth moving forward.
Long-Term Economic Growth Prospects in Europe
Looking forward, several structural challenges threaten Europe's long-term growth potential, including aging populations and stagnant demographics in major economies like Germany and Italy. The ongoing discourse around rising consumption among European consumers indicates a shift towards increased domestic spending, which is critical for fostering economic recovery amidst subdued growth rates. Moreover, the application of advanced technologies, such as AI, in key sectors such as healthcare promises to boost efficiency and productivity, potentially mitigating the adverse effects of demographic challenges. Ultimately, while Europe's growth rates may remain below those of the U.S., the quality of life and standard of living may improve, reflecting a divergence between GDP metrics and overall economic well-being.
Germany’s chancellor-in-waiting, Friedrich Merz, has promised “independence” from the US, having become convinced that the Trump administration is “largely indifferent to the fate of Europe”. As a result, he hopes for significant spending on defense and infrastructure. Against that backdrop, and after years of lackluster growth, Germany’s DAX index has been among the best performing markets. Can the spending plans add to the nation’s renewed momentum? Featured in this episode is Paul Donovan, Chief Economist for UBS GWM, alongside host Christopher Swann.
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