The beginning of December marked the beginning of the campaign for the upcoming parliamentary elections in Germany, to be held on February 27, after the collapse of Chancellor Olaf Scholz so-called “traffic light coalition”. The government fall caused by the dismissal of Finance Minister Christian Lindner will lead to sharp changes in German politics if Scholz’s SPD loses the elections, as is almost inevitably expected according to public opinion polls, and is replaced by the CDU, Angela Merkel’s party, now led by the much more conservative Friedrich Merz.

The German political earthquake comes at the most unstable moment when the world is preparing for the return of Donald Trump as the US president , with the escalation of wars in Ukraine and the Middle East, the threat of introducing American tariffs on European products, the weak German economy that will end the year in recession and with no visible solutions for the rise of China, which directly affects key parts of the German economy. In such an environment, the changes in Berlin will inevitably affect Serbia as well, for which Germany is the main trading partner and the second largest investor, after China.

 In the company of Trump, Xi Jinping and Putin, Merz fits in naturally, which can give him the authority that his social democratic predecessor lacked at the global stage where decisions are to be made in the coming years.

Germany will end 2024 with a 0.1 percent decline in economic activity, with a modest growth of 0.7 percent expected in the coming year, and in 2026 a still anemic 1.3 percent. The auto industry, the heart of its economic mechanism, is threatened in multiple ways. On the one hand, Trump, by announcing 10 percent tariffs , directly named the German auto giants as a target. On the other hand, the Chinese market is increasingly turning to local manufacturers of (primarily electric) cars, which is why German companies have been losing market share in this, for them, the most important foreign market for four consecutive years. Also, German (and European in general) manufacturers are lagging behind both American and Chinese competitors in the transition to electric drive, which makes them less and less competitive in domestic markets as well, why the EU had to resort to its own tariffs on Chinese vehicles to help its failing auto giant.

The result is a big drop in the value of all German car manufacturers, a drop in sales, and in the case of Volkswagen even the closing of factories in Germany itself – unthinkable in the 83 years of this brand’s existence. This is also dangerous for Serbia, where 80,000 workers German companies employ here, are largely part of suppliers of the auto industry: Leoni, Kontinental, ZF and others. Germany is responsible for 4.6 billion dollars of Serbian exports, which is why every economic ripple in Berlin is felt in Belgrade.

Merz’s coming to power will not solve these problems by itself, but his distinctly pro-business approach could help.

He is an American-type conservative – traditional in social matters, but liberal in economic ones. Although he is a CDU politician like Angela Merkel, he is a decades-long opponent of the former chancellor and her policies and a man whom she marginalized so much that he left politics and returned to it only after she left office. Meanwhile, he became a millionaire working for Black Rock. He is a critic of immigration and the green agenda, which will undoubtedly turn Germany to the right. His sober style and belief that Germany should turn from a “sleeping power” into a “leading power” will also mark the end of Emmanuel Macron’s era as the unquestionable first address for solving key European issues.

In the company of Trump, Xi Jinping and Putin, Merz fits in naturally, which can give him the authority that his compromise-prone, social democratic predecessor lacked at the global stage where decisions are to be made in the coming years.

The decline in the value of German car manufacturers seriously threatens the Serbian economy, because German companies employ around 80,000 workers in Serbia and contribute 4.6 billion dollars to Serbian exports.

All this shapes his policy: Merz (who wants the EU as a relevant power) strongly supports Ukraine’s fight against Russia, but this did not prevent him from accusing Ukrainian refugees of “social tourism” (sozialtourismus) in Germany. Unlike the cautious Scholz, Kiev will be given “Taurus” missiles to shoot deep into Russian territory. He sees China as a threat. In classic American Republican fashion, he plans to cut both corporate taxes and social benefits. He intends to restart nuclear power plants and sharply curtail the flow of non-European immigrants to Germany, directly undoing Merkel’s legacy. He thinks that Germans work too little, and for that he cites the statistics of the increase in the number of employees, not accompanied by an equal increase in the number of working hours.

Key to the issue of the fall of Scholz’s government, which collapsed in the conflict over the fiscal rule change that limits the growth of Germany’s borrowing, Merz signaled his willingness to revise this rule, that is, to one way or another enable the state to borrow more money in order to solve acute the problems of financing the Ukrainian resistance to Russia and investing in its own economy.

All of these measures, if implemented, could reverse Germany’s economic lethargy and spur much-needed growth that would then give the rest of Europe a boost. Merz’s willingness to relieve the economy, rein in social benefits, finance productive investments and loosen certain ideological green initiatives would be particularly effective in that direction. The problem, however, is that the CDU will undoubtedly have to form a coalition government, either with Scholz’s SPD or the Greens or both. In the case of a coalition with the SPD, the reduction of social benefits would be difficult, and in the case of the Greens, the reactivation of nuclear power plants.

Germany’s loosening of fiscal brakes could also encourage others to increase public funding and lower taxes, although Germany has previously opposed such practices in the interest of stability – the result, however, is that this country has been practically without any economic activity in recent years.

However, if Merz were to succeed in implementing these plans, it would have far-reaching consequences to be felt in Serbia as well. Not only would raising economic growth in Germany revive the demand for products from Serbia, which would stop the already noticeable slowdown in the inflow of German investments (from 419 million euros in 2022 to only 170 million in 2024) and even the withdrawal of some already existing ones –  such as the production of auto parts at ZF moving production to China His mistrust of China, which he shares with Trump, could lead to a larger “nearshoring”, the practice of moving production in the opposite direction – from China to closer and still cheaper production destinations, such as the countries of Eastern Europe and the Balkans.

Germany’s loosening of fiscal brakes could also encourage others to finance public investments and reduce taxes, especially since Germany has always been a fiscal policeman in Europe, opposing such practices in the interest of stability. The result, however, is that this country has experienced virtually no economic growth in the last few years. A change of course could give the European continent the much-needed dynamism it needs to compete with China and the US.

Expectations for Merz’s arrival are high. It is believed that the measures he proposes could revive economic growth and German industry and have positive effects on countries with which Germany has a trading partnership, including Serbia.

Another consequence of a tougher foreign policy, especially in conjunction with Trump’s announcements, could be the end of the war in Ukraine. Regardless of the peace conditions, two almost certain consequences would be a drop in energy prices and a partial restoration of the gas supply from Russia, which has now almost dried up due to purchase of liquid gas from the US and Qatar. Calming these prices would give a necessary boost to European industry and free up funds for more productive spending, while reducing payments to finance the Ukrainian military resistance, which is now a priority of European foreign policy.

And yet, the fear of “another” Ukraine, coupled with the fear of American pressure for greater NATO funding contributions with the threat of withdrawing US military protection if Trump’s demands are not met, will in the long run turn the EU towards strengthening its own defense system that will rely less on American umbrella.

Another issue that could have repercussions in our region is the migrant policy of the future German government, which will apparently be significantly more restrictive compared to the last decade of Angela Merkel’s and now Olaf Scholz’s rule. Merz’s idea to return non-European refugees from Germany’s borders could put pressure on countries bordering EU member states to stop the flow of migrants to EU territory. This has already led to the actualization of the idea of ​​creating “return hubs” for migrants in countries outside the EU, where the agreement that Italy has with Albania on the acceptance of illegal migrants there is being one of the models. A stronger turn to the right by Germany and the rest of the EU could put pressure on Serbia to get involved in solving this issue in a similar way.

All in all, the expectations of Merz’s arrival are high. Not only is it believed that the measures he proposes could revive economic growth and German industry and have positive effects on countries with which Germany is the main trading partner, such as Serbia, but these changes would also have a positive effect on the euro, which has begun to be losing strength against the dollar.

The ultimate benefit, however, could be political clarity in the EU’s most powerful country, especially in light of constant internal instability in France, whose government has just fallen again, and which has until now sought to fill the void in European leadership created by the departure of Angela Merkel. With the arrival of Friedrich Merz, things have the potential to return to the positions that Europe and the world were used to in the previous two decades, albeit with a completely different and much more closed policy.

Author: IPESE Research Team
Featured image: Bloomberg