Germany finally has a leader. Now comes Merz’s difficult part

After some dramas, and about 10 weeks after the German elections, the largest economy in Europe finally has a leader: Friedrich Merz.

However, his ascension was not easy. On Tuesday, Merz could not be elected Chancellor in a surprising first round vote, an unprecedented event in the country’s modern history. Despite ensuring the necessary parliamentary support in a second attempt later in the day, Merz seems to be starting his new somewhat bruised role.

“It is the weakest possible beginning,” said Carsten Brzeski, head of Macro Global of ING, to CNBC.

Other observers such as Cyrus de la blonde, chief economist of the Commercial Bank Hamburg, seem less concerned.

“I think that in a week more or less from now on, nobody will talk more about that. On the other hand, people will analyze what the government is deciding and doing,” he told CNBC.

In any case, hard work actually begins for the new chancellor and head of the coalition government that is composed of its Christian democratic union, with its affiliate to the Christian social union and the Social Democratic party.

Some of the challenges include addressing division within the country on issues such as migration, geopolitical tensions around spending and defense trade, a stagnant economy and maintaining the united ruling coalition and online.

The economy of Germany will be of the mind for Merz, after having made promises of reforms and new investments, and having criticized hardly the policies of the previous government during the electoral campaign.

For more than two years, the country has seen an economic expansion and alternating contraction every quarter. The annual growth of the gross domestic product was negative both in 2023 and 2024. And the last forecasts do not seem to indicate much respite ahead.

This despite the main fiscal package promoted by CDU/CSU and SPD during their coalition negotiations, which include changes in the long -standing debt rules to allow more defense expenses and an infrastructure and a climate investment fund of 500 billion euros ($ 567 billion).

That cash at least seems safe, but questions about other fiscal and economic policies have emerged, Brzeski said of ING.

“I think the 500 billion euro infrastructure package will not be touched and it is a treatment made,” said Brzeski. “All other measures, such as the fastest cancellations for investments or corporate tax cuts in 2028, have become even more uncertain than before,” he added, linking this with a now greater risk of possible confrontations about the country’s budget.

Franziskka Palmas, a senior economist of Europe in Capital Economics, also sees that the fiscal package is implemented as planned.

“We believe that will give a significant impulse to GDP growth and get Germany out of the stagnation after six years,” Palmas told CNBC, but said that due to the apparent dissatisfaction within the parts of the features of the coalition, the risks of such impulse being smaller or that it has increased more time.

Another key issue affected by Tuesday’s agitation is confidence within the coalition, and that could be vital for government economic policy, according to Otto Fricke, former member of the Bundestag for the Free Democratic Party.

“The problem really here is in the end, it is the most important issue in politics: trust,” he said, speaking with the “Early Edition” of CNBC on Wednesday. Germany’s economy needs changes and fast, if the goal is to grow, said Fricke.

“Therefore, he needs confidence within the cabinet, within the Parliament, to make the legislation quickly.”

The Palmas de Capital Economics pointed out Merz’s votes that his government would be more stable than the previous one, which finally crumbled for disagreements on economic and fiscal matters.

However, after the difficult beginning of his mandate, “the risk that he cannot fulfill his promise that he will execute a much more efficient and conflict free government compared to the previous traffic light coalition has increased,” he said.

But despite the apparent tensions and the greatest instability, meanwhile, the Blonde Hamburg Bank said that, as highlighted by its joint coalition agreement, the CDU/CSU and SPD are not so far politically so separate.

For example, everyone should be able to agree on the need to invest in railways, roads, bridges and other infrastructure through the background, and the consensus on defense spending must also be found without “bitter conflicts,” he said.

So, while the failure of Merz’s first round on Tuesday may have been an attempt by the members of the Parliament to teach him a lesson, he should not mean that the new government takes away from a great change, said the blonde.

“It does not mean and should not mean that they have to refrain from making the necessary reforms with respect to the modernization of infrastructure, reduce bureaucracy, especially when it comes to approval processes for construction work, wind farms and electrical networks, improve digitalization processes and take measures to reduce labor scarcity,” he said.

“I have little doubt that the new government can implement its great policy objectives”