Germany: A Conservative Restoration Amid Radical Undercurrents

On 23 February 2025, Germany held its early federal elections, resulting in a profound reconfiguration of its political landscape. The conservative CDU/CSU alliance emerged as the largest bloc in the Bundestag with 28.5 percent of the vote and 208 seats, placing its leader, Friedrich Merz, in a strong position to form the next federal government. This return to power for the centre-right signified a partial reversion to political continuity. However, beneath this conservative victory lay the most significant gains yet by far-right forces in the Federal Republic’s post-war history.

The Alternative for Germany (AfD), securing 20.8 percent and 152 seats, became the second-largest party in the Bundestag for the first time, displacing the Social Democratic Party (SPD) to third place. This electoral performance represented the AfD’s best result in a nationwide election and was driven by deepening voter discontent over economic stagnation, immigration, and geopolitical uncertainty. The formerly governing "Traffic Light" coalition, composed of the SPD, Greens, and Free Democratic Party (FDP), suffered severe losses. The SPD, in particular, experienced a historic collapse, falling over nine percentage points to 16.4 percent, its worst result since 1887. The Greens declined to 12 percent, and the FDP, whose withdrawal from government triggered the election, dropped below the 5 percent threshold with just 4.3 percent and was eliminated from parliamentary representation.

Voter turnout reached 82.5 percent, the highest since reunification, reflecting widespread anxiety among the electorate. The AfD’s success was especially pronounced in the eastern Länder, where it came first across the former GDR. The far-left party, Die Linke, also staged a late resurgence, rising to 9 percent from less than 5 percent just a month earlier. These developments reveal an electorate drifting towards the political extremes, symptomatic of deeper structural grievances.

The economic roots of this polarisation lie in rising inequality, stagnant real incomes for the middle class, regional industrial decline, cost-of-living increases, job insecurity driven by globalisation and automation, and tensions over the distribution of welfare between native citizens and migrants. These factors have been particularly acute in the east, contributing to a sense of economic marginalisation and alienation from Berlin's policy consensus. The resulting radicalisation of political discourse has implications far beyond the Bundestag’s composition.

For businesses, this environment introduces volatility and hesitancy. The fragmentation of the Bundestag complicates coalition negotiations, delaying the formation of a government and hampering economic policymaking. Strategic decisions may be postponed, investment plans stalled, and long-term planning reduced. Should a minority government or unstable coalition emerge, this would risk legislative gridlock, financial market fluctuations, and a further erosion of confidence.

The most plausible outcome remains the formation of a “grand coalition” between the CDU/CSU and SPD, a familiar but uninspired solution. This configuration would prioritise fiscal moderation and political stability over bold reform. Business leaders can expect a restrained tax regime, moderate industrial subsidies, and a measured path towards budgetary consolidation. Structural reform, however, is likely to proceed slowly, with compromises between competing ideological blocs leading to ambiguous outcomes.

Friedrich Merz, as Chancellor-in-waiting, has already outlined ambitious priorities. Chief among them is a large-scale investment plan aimed at economic revitalisation and national defence. His government proposes to exempt spending above 1 percent of GDP on defence and security from the constitutional debt brake, enabling a projected €500 billion investment over twelve years. This includes both military and civil infrastructure, alongside increased support for intelligence and foreign partners under threat.

Merz has framed this initiative as a reassertion of Germany’s role as a geopolitical actor. Conscious of growing uncertainty surrounding US security guarantees, particularly under the administration of Donald Trump, Merz has vowed to pursue European strategic independence. He has proposed consultations with France and the United Kingdom on nuclear deterrence and suggested expanded joint military operations, although there are no plans to host foreign nuclear infrastructure on German soil.

The weakening of the Greens is expected to result in a more pragmatic energy policy. This includes a possible relaxation of decarbonisation targets, reduced regulatory pressure on industrial sectors, and a reconsideration of the pace of the energy transition. Energy-intensive sectors may benefit from extended timelines for compliance with environmental standards and measures to reduce costs. At the same time, digital transformation and technological sovereignty are likely to be key themes, with an emphasis on modernising traditional industries, supporting innovation, and simplifying regulatory frameworks for start-ups.

Small and medium-sized enterprises (the backbone of the German economy, known collectively as the Mittelstand), will be offered administrative relief, but may also face tightened immigration rules that exacerbate labour shortages. Merz has committed to skilled immigration, but a general restriction of other categories is anticipated. This will increase personnel costs in sectors heavily reliant on migrant workers and introduce additional bureaucratic burdens.

Internationally, the new government is expected to pursue a more pragmatic approach to economic relations. This entails a cautious stance on expanding EU economic powers, a focus on protecting German export interests, and efforts to diversify trade to avoid overdependence on single markets, especially China. A shift towards realism in global trade policy aligns with the broader theme of cautious economic nationalism now prevalent across several Western economies.

Despite these adjustments, the fundamental challenges facing Germany remain unresolved. The country confronts a demographic crisis, a technologically outdated pension system, energy and labour cost pressures, and continued dependence on global supply chains. The radicalisation of the electorate, particularly in the eastern states, further threatens national cohesion and investor confidence. Regions with high support for extreme parties may find themselves increasingly isolated, economically and politically, necessitating targeted development programmes to prevent further divergence.

Merz’s administration will be tasked with balancing short-term political stability with long-term structural reform. The CDU’s traditional fiscal conservatism suggests that there will be no return to large-scale state spending outside the agreed exceptions, with policy focused instead on creating favourable conditions for private capital. Nevertheless, the underlying social discontent that produced this electoral outcome cannot be ignored.

While international reactions to Merz’s victory have been broadly supportive, with praise from leaders such as Ukrainian President Volodymyr Zelensky and Israeli Prime Minister Benjamin Netanyahu, the global community is watching closely. Donald Trump, the incumbent US President, welcomed the CDU’s return and lauded German voters for rejecting what he termed a “no common sense agenda”.

However, the exclusion of the AfD from government, in spite of its electoral gains, reaffirms the enduring strength of Germany’s political firewall against extremism. Although sections of the AfD have been designated as right-wing extremist by domestic intelligence services, the party continues to grow in influence, particularly among younger voters via platforms such as TikTok. Its policies, which include a referendum on EU membership, dismantling of climate policies, and renewed ties with Russia, signal a clear break from Germany’s post-war consensus.

In conclusion, the 2025 election marks a decisive yet paradoxical moment for Germany. The CDU/CSU’s return to power brings an element of continuity, but the context in which it occurs is anything but stable. The growing divide between centrist governance and radical social currents presents an enduring challenge. For now, Germany has chosen stability. The question is whether that stability is sufficient to contain the forces of division that now lie just beneath the surface.