Merz survives shock first-round defeat to become German chancellor

Friedrich Merz is now the chancellor of Germany, but the route to the office was unlike any in the Federal Republic's postwar history. After roughly ten weeks of coalition talks following the February election, the CDU/CSU leader faced the Bundestag on Tuesday expecting a routine confirmation. He did not get one. In the first round of voting, 18 members of his own parliamentary bloc withheld support, denying him the absolute majority required by the Basic Law. The shock forced a second ballot hours later, which he won with 325 votes to 289. The episode has left the new government visibly bruised before it has passed a single law.

The numbers tell their own story. Merz commands a coalition of 328 seats in a 630-seat chamber, a majority of just 13. The first-round deficit of 18 votes came entirely from within the CDU/CSU and SPD ranks, suggesting dissatisfaction with the coalition agreement, the cabinet lineup, or Merz's leadership style. No chancellor candidate in the history of the Federal Republic had ever failed on the first attempt. The precedent is not merely symbolic; it signals a parliamentary cohort willing to use the secret ballot as a disciplinary tool.

A coalition built on compromise and fragility

The governing alliance pairs Merz's Christian Democrats with their Bavarian sister party, the CSU, and the Social Democrats of outgoing chancellor Olaf Scholz. The coalition agreement, finalised in late April, reflects months of negotiation over migration, social policy, and the public finances. On migration, the parties agreed to tighten border controls and accelerate deportations while preserving the right to asylum, a formulation that satisfies neither the CSU's hardliners nor the SPD's left wing. On social policy, the SPD secured a higher minimum wage and pension guarantees; the CDU/CSU won a commitment to reduce bureaucracy and reject tax increases.

The fragility is structural. The SPD enters government after its worst electoral result since 1887, with many members questioning the wisdom of a third grand coalition in four cycles. The CSU, meanwhile, faces pressure from the AfD in Bavaria and cannot afford to look soft on migration. Merz himself has never held executive office at federal level; his only ministerial experience was a brief stint as education minister in North Rhine-Westphalia in the 1990s. His authority rests on a party leadership he won only at the third attempt, in 2022.

The economic inheritance: six years of stagnation

Germany's economy has been the sick man of the euro area since the pandemic. Annual GDP contracted by 0.3% in 2023 and by 0.2% in 2024, according to Destatis, the federal statistical office. Quarterly growth has alternated between expansion and contraction for eight consecutive quarters, a pattern economists describe as a technical recession without a single deep downturn. Industrial production remains below its 2017 peak. Energy costs, demographic decline, and weak Chinese demand have combined to erode the export model that powered German prosperity for two decades.

Merz campaigned on a promise to reverse the decline. His platform emphasised faster planning approvals, digitalisation of public administration, and a supply-side agenda of tax cuts and deregulation. The coalition agreement delivers a fiscal package of historic scale: a 500 billion euro special fund for infrastructure and climate investment over ten years, financed by suspending the constitutional debt brake for defence spending above 1% of GDP and by creating an off-budget vehicle for the investment fund. The package required a two-thirds majority in the outgoing Bundestag, which the CDU/CSU and SPD secured with Green support in March.

The fiscal package survives, for now

Analysts agree the 500 billion euro fund is insulated from the parliamentary turbulence. "I think that the 500bn euro infrastructure package will not be touched and is a done deal," said Carsten Brzeski, global head of macro at ING. The fund's legal basis, a constitutional amendment passed before the new parliament convened, makes it difficult to unwind. Franziska Palmas, senior Europe economist at Capital Economics, expects the spending to "give a significant boost to GDP growth and get Germany out of stagnation after six years," though she cautions that the risk of a smaller or delayed boost has risen.

What is less certain are the supply-side measures Merz highlighted during the campaign. Accelerated depreciation for business investment, a corporate tax cut scheduled for 2028, and a reform of the corporate tax base all require ordinary legislation and annual budgetary approval. "All other measures, like the faster write-offs for investments or the corporate tax cuts in 2028 have become even more uncertain than before," Brzeski said, linking the uncertainty to a heightened risk of budget clashes. The coalition's wafer-thin majority means any dissent on tax or spending bills could become a confidence issue.

Trust, the invisible currency of coalition government

Otto Fricke, a former FDP Bundestag member who served in the traffic-light coalition that collapsed last year, argues the first-round defeat has damaged the most essential resource of any government: trust. "The problem really here is at the end, it's about the most important issue in politics: trust," he told CNBC's Europe Early Edition. "Germany's economy needs changes, and fast, if the goal is for it to grow. Therefore, you need trust within the cabinet, within the parliament, to do the legislation fast."

The previous coalition, SPD, Greens, and FDP, disintegrated over a dispute about whether to suspend the debt brake to fund energy subsidies and industrial policy. Merz explicitly promised a more stable, conflict-free administration. Palmas notes that "the risk that he will not be able to deliver on his promise that he will run a much more efficient and conflict-free government compared to the previous traffic-light coalition has risen." The first-round rebellion suggests that promise is already being tested.

Divergent expert views on the government's trajectory

Not every observer sees crisis. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, expects the episode to fade quickly. "I think that in a week or so from now, nobody will talk much about it anymore. Instead people will look at what the government is deciding and doing," he said. He points out that the CDU/CSU and SPD are "not that far apart politically" on the core items: railways, roads, bridges, and defence spending. Consensus on those priorities, he argues, can be found without "bitter conflicts."

De la Rubia goes further, insisting the first-round upset should not deter reform. "It does not mean and it must not mean that they have to refrain from doing the necessary reforms with respect to modernising the infrastructure, to reduce red tape especially when it comes to approval processes for construction work, wind farms, and electricity grids, improve digitalisation processes and take the measures to reduce labour shortage," he said. "I have few doubts about that the new government will be able to implement its big policy goals."

Defence spending and the NATO imperative

The fiscal package's defence component responds to a geopolitical shift that Berlin can no longer ignore. Russia's war in Ukraine, now in its fourth year, and Donald Trump's return to the White House have forced Germany to confront its chronic underinvestment in military readiness. The coalition has committed to meeting NATO's 2% of GDP target permanently, not just in 2024 as a one-off. The constitutional amendment allows defence spending above 1% of GDP to be exempt from the debt brake, effectively creating a permanent fiscal window for rearmament.

Implementation will test the coalition's cohesion. The SPD's left wing has historically opposed large defence budgets, while the CSU demands rapid procurement of German-made systems. The defence ministry, led by CDU politician Boris Pistorius, retained from the Scholz cabinet, must translate the financial authorisation into contracts, recruitment, and capability gains. The Bundestag's budget committee will scrutinise every major programme. Any perception of waste or favouritism could reignite the internal dissent that surfaced on Tuesday.

Migration: the policy that could fracture the coalition

If defence spending is a shared necessity, migration remains a potential fracture line. The coalition agreement toughens border controls, expands detention for deportation, and restricts family reunification for subsidiary protection holders. The CSU calls it a paradigm shift; the SPD's parliamentary left calls it a betrayal of humanitarian principles. The AfD, now the largest opposition bloc, will attack any measure as insufficient. Merz's first major legislative test may be a migration bill that forces SPD deputies to choose between coalition discipline and their conscience.

The first-round vote already hinted at this dynamic. Several SPD deputies are believed to have withheld support for Merz in protest at the migration chapter of the coalition agreement. If that pattern repeats on substantive legislation, the chancellor will need opposition votes, most likely from the Greens or the FDP, to pass bills, effectively governing as a minority. That would be a profound shift in German parliamentary culture, where majority governments have been the norm.

What happens next: the first 100 days

The immediate calendar is crowded. The cabinet must be formally appointed by the federal president, a formality that will occur within days. The chancellor's first government statement to the Bundestag, traditionally delivered within two weeks, will set the legislative agenda. The 2025 federal budget, already delayed by the coalition talks, must be passed before the summer recess. The infrastructure fund's governing board needs to be staffed and its first tranche of projects approved. Merz has also promised a "bureaucracy brake" law to cut reporting obligations for businesses by 25% within the legislative term.