Before Friedrich Merz won Germany‘s parliamentary elections in February of this year, the country faced a money dilemma: Germany’s economic stagnation required significant reform and investment to revitalize industry, and the United States demanded more spending on collective defense. The budgetary dispute over how to together address these conflicting priorities had led to the collapse of Chancellor Olaf Scholz’s government. To avoid the same fate, lawmakers in Merz’s grand coalition, comprising the center-right Christian Democratic Union and the center-left Social Democratic party, as well as the Greens, agreed to leverage debt to finance its dual obligations.Suddenly, Germany was flush with money.

Seven months in, though, Merz’s government has still been unable to chart a course for economic reform and persuade voters that better days lie ahead. Merz’s bold moves on defense spending have confirmed Germany’s leadership role in Europe but at a cost to his domestic popularity. Merz’s expenditure of significant political capital at international summits to manage U.S. President Donald Trump and defend Ukraine has left him vulnerable to accusations that he is focusing too much on foreign policy and not enough on domestic issues. The right-wing, Russia-friendly Alternative for Germany party (AfD) is channeling economic anxiety to profit in the polls, criticizing Merz’s government for squandering German wealth to build a “war economy.” And even though Merz’s efforts on defense have won him praise from the White House,the Trump administration is steadily undermining him by normalizing the AfD and-in the words of the newly released National Security strategy-other “patriotic European parties.”

Merz’s government does not have much time to hedge against growing discontent within the electorate. Failing to pursue reforms to revitalize and grow Germany’s economy could jeopardize public support for Merz’s centrist coalition. If the Christian Democrats and the Social Democrats cede more ground to the AfD, they may also lose their ability to build viable future coalitions. If the grand coalition proves unable to pursue a path of economic reform and growth, it could break up the government prematurely and reverse Germany’s long-awaited leadership role in Europe, to the detriment of U.S. interests.

Angela Merkel, Germany’s former leader and Merz’s chief rival, became chancellor in 2005 by sidelining Merz and other candidates. She then managed to stay in power for 16 years by avoiding perhaps disruptive reforms. This is not a formula that Merz can afford to follow.

MONEY MOVES

Merz entered office with a mandate to build up Germany’s defense capabilities and improve its economy. To avoid the guns-versus-butter debate haunting many European governments, Merz bucked his party’s traditional preference for fiscal discipline and pushed the parliament to loosen Germany’s debt brake. Established in 2009, the brake caps deficit spending at 0.35 percent of GDP. Soon after this year’s federal election, the German parliament amended the debt brake to allow for unlimited deficit spending on defense and avoid significant cuts in areas such as social welfare. Merz also agreed to earmark an unprecedented 500 billion euros to invest in Germany’s crumbling infrastructure.

At the same time, Berlin has sought to fulfill the country’s obligations to European security.During the NATO summit at The Hague in June, Germany pledged to increase spending on defense to five percent by 2035, with 3.5 percent of that covering core defense requirements. Merz has taken advantage of a degree of fiscal flexibility that Germany’s European peers cannot match: france, for example, is already heavily indebted, whereas the debt brake has afforded Germany a more balanced budget and thus more room to maneuver. Under pressure, too, from Trump, Merz has already announced a massive increase in Germany’s military spending; the country is projected to meet its NATO pledge well ahead of schedule. Germany’s defense budget-projected at 650 billion euros in total over the next five years-is now the largest in the European Union. Approximately 8.5 billion euros per year is earmarked for support for Ukraine.

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The Rise of the AfD and challenges for germany’s CDU

Germany’s political landscape is undergoing a significant shift, marked by the increasing prominence of the Alternative for Germany (AfD) and the challenges this presents for the Christian Democratic Union (CDU), traditionally the dominant force in German politics. The AfD’s ascent, coupled with geopolitical uncertainties, is forcing the CDU, led by Friedrich Merz, to navigate a complex path between maintaining its conservative values and adapting to a changing electorate and international order.

The AfD’s Trajectory

founded in 2013, the AfD initially focused on opposition to the Eurozone and European monetary policy.Though, it quickly pivoted to capitalize on anxieties surrounding immigration, especially during the 2015 refugee crisis. This shift proved pivotal, attracting voters disillusioned with mainstream parties and fueling anti-immigrant sentiment. The party gained traction by positioning itself as a defender of traditional german values and national identity.

Initially considered a fringe movement, the AfD steadily gained depiction in state parliaments and, crucially, entered the Bundestag (German Parliament) in 2017. Its success was largely attributed to exploiting discontent with Chancellor Angela Merkel’s open-door immigration policy.The party’s rhetoric often veered into nationalist and xenophobic territory,drawing criticism from across the political spectrum.The AfD’s core support base remains concentrated in eastern Germany, where economic stagnation and feelings of being left behind have created fertile ground for populist appeals.

In May 2024, Germany’s Federal Office for the Protection of the Constitution officially designated the AfD as an extremist institution [Reuters]. Despite this designation, the party continues to achieve unprecedented electoral success, becoming the most successful far-right party in Germany as World War II. This success underscores the depth of dissatisfaction within segments of the german population and the challenges facing mainstream parties in addressing these concerns.

Growing Pains for the CDU

Friedrich Merz, the leader of the CDU, faces a difficult balancing act. He must contend with the rise of the AfD on the right while simultaneously navigating a complex geopolitical landscape characterized by the potential for U.S. retrenchment and increased Russian aggression. These challenges demand increased defense spending and proactive international diplomacy.

Chancellor Olaf Scholz recognizes the interconnectedness of foreign policy and domestic prosperity and has attempted to articulate this link to the public. Though, the CDU struggles to effectively communicate its vision in a way that resonates with voters increasingly drawn to the AfD’s simplistic narratives. The party is grappling with an identity crisis, torn between its traditional center-right values and the need to appeal to a broader electorate.

The CDU’s internal divisions further complicate matters. Some within the party advocate for a more assertive stance against the AfD, while others favor a more conciliatory approach, fearing that alienating potential voters will only drive them further into the arms of the far-right.This internal debate reflects a broader struggle within the German conservative movement to define its place in a rapidly changing political landscape.

The Geopolitical Context

The war in Ukraine and growing tensions with Russia have heightened the stakes for German foreign policy. Germany, traditionally a proponent of multilateralism and economic engagement, is now under pressure to assume a more assertive role in defending European security. This requires increased investment in defense capabilities and a willingness to confront Russia’s aggressive behavior.

However, Germany’s economic dependence on Russia, particularly in the energy sector, has created vulnerabilities. The disruption of gas supplies following the invasion of Ukraine exposed Germany’s reliance on Russian energy and forced the country to scramble for alternative sources.This experience has underscored the need for greater energy independence and diversification.

Furthermore, the potential for a shift in U.S. foreign policy