Merz’s Free Market Gamble: How Merz’s Economic Policy Could Fuel the AFD’s Rise

Callum Yeaman

German Chancellor Friedrich Mer (Via: bundesregierung.de)

Germany is in the midst of a prolonged period of economic stagnation. It is well known that over the past decade, Germany has been plagued by industrial malaise. Friedrich Merz, the recently inaugurated right-wing Chancellor of the Christian Democratic Union (CDU), has pledged to absolve Germany from its deep-seated economic headwinds. In an era of economic and political turbulence, with Germany's rapidly decaying infrastructure and the growing popularity of the radically conservative Alternative for Germany (AfD) party, Merz has assumed leadership at a pivotal moment in Germany's history. His ability to address the root cause of Germany's economic struggles—its rapid industrial decline—will have immense consequences for Germany's future.

While Merz's infrastructure investments address symptoms, his faith in deregulation and trickle-down economics fails to target the root causes of industrial decline—energy deficiency, Chinese competition, and tariffs—potentially fueling AfD's rise.

Despite relative industrial growth across the rest of the EU, German steel output declined 12 percent in the first half of this year compared with last year. Vehicle production in Germany has dropped sharply, from 5.65 million units in 2017 to 4.1 million in 2023. Germany's industrial sluggishness is of particular significance because, at its strongest, its economy is highly dependent on exports. German industry has failed to support its export-heavy economic system, as export-to-GDP rates have sunk significantly below the EU average. Merz's ability to successfully address the root causes of Germany's industrial stagnation is of vital importance.

A key cause of Germany's industrial struggles is its energy crisis. After Russia’s invasion of Ukraine and the sharp reduction of Russian pipeline gas deliveries, energy prices surged, forcing Germany to scramble to restructure its energy mix while still pursuing ambitious decarbonisation targets. 

Another factor is Germany's shifting relationship to China. Years ago, China was a stable export destination, reliant on Germany for machinery and premium cars. Recently, China has developed independence in these areas and has become a head-to-head competitor with Germany in these sectors. Martin Sandbu of the Financial Times suggests that German industrial decline may have emerged not "because of weakening export markets but its struggle to compete in its home market—against Chinese-made electric vehicles." 

Finally, Trump's tariff regime has had a deleterious effect on Germany's already dwindling steel and automobile industries. 

Merz has advocated addressing these problems by passing a massive infrastructure bill and hiking military spending—but forcefully, with social spending cuts, privatization, and deregulation. 

In February, Merz circumvented historic constitutional spending limits, allowing unlimited defense spending and creating a special €500 billion, 12-year vehicle to modernize the country's infrastructure. Despite his massive spending on infrastructure, much of the rest of his economic agenda consists of social spending cuts, privatization, and deregulation.

Unfortunately, Merz's approach appears unlikely to work. The most effective approach to Germany's industrial malaise would likely be to address the diminishing steel and automotive industries directly: hiking spending on decarbonized energy and promising new technologies. Instead, Merz has evaded funding new technological and scientific enterprises and placed his faith in trickle-down economics. Especially after his massive €500 billion spending bid, the consequences of Merz's decision to place his faith in free markets will be crucial.

A more effective approach might be to cut spending limits across more sectors than just military and infrastructure, in order to use debt-funded spending to help the struggling industry sectors directly. Merz's bid to let free market forces save the declining automotive and steel industries seems like a gamble rather than a strategic approach. 

In fact, after the release of his economic plan, his public support has waned, with only 30% of Germans expressing confidence in Merz's ability to genuinely stimulate economic growth.

Merz's failure to strategically address the underlying causes of Germany's economic crisis will have immense repercussions for Germany's already tumultuous political climate. The AfD, like many extremist movements, has historically capitalized on economic vicissitudes and bureaucratic incompetence. In fact, the AfD only emerged 10 years ago, conveniently at the beginning of Germany's economic turbulence. As Germany's economic malaise has deepened, its support has only grown.

Crucially, the AfD is dominant in industrial areas. The AfD's base is concentrated in

Thuringia, an area dominated by manufacturing and industry, and regions with the highest "poverty gaps" and economic deprivation. In fact, a staggering 21% of Germans who are blue-collar workers or underemployed back the AfD. Thus, Merz's ability to stimulate growth in industries is particularly important to the AfD's base.

The effectiveness of Merz's agenda is even more vital after his massive spending bid. The AfD has publicly criticized his €500 billion in infrastructure spending, and his agenda already lacks public support. This is vital because the majority of AfD's supporters are CDU converts. As reported by the Financial Times, Paderborn, an industrial district that has voted for the CDU for the past eight decades, was recently overtaken by support for the AfD. If Merz continues to lose support among the mainstream conservative party, a further increase in AfD votes is highly probable.

The AfD is a radical force that has made claims absolving the actions of Nazis, denying climate change, turning Europe into a "fortress" against migrants, calling for "emancipation" from the United States, and endorsing Russia's invasion of Ukraine. The consequences of Merz's intense faith in free-market economics may have disastrous implications for Germany's future.