(Bloomberg) -- Germany’s ruling coalition is still in power, but the three-party alliance currently exists in little more than name.
Behind the scenes in Berlin, talk of a breakup before scheduled elections next September has become more pronounced. Some high-ranking officials have mused that the only thing that can save the so-called traffic light coalition is the fear factor that would result from Donald Trump winning a return to the White House, according to people close to the situation, who asked not to be identified because the discussions were private.
The extent of the frayed relationship is on full display on Tuesday, with Scholz and Finance Minister Christian Lindner of the pro-business Free Democrats hosting parallel and partly competing meetings with industry officials to explore ways to revive the country’s stagnating economy. Neither invited the other, and both shut out Economy Minister Robert Habeck of the Greens, who last week surprised his cabinet colleagues with a proposal for a Germany Fund to bolster investment.
Scholz, Habeck and Lindner have been key over the past three years to brokering compromises within the coalition, but they’ve lost each other’s trust to some degree and shifted focus to winning over voters rather than trying to find common ground, the people said.
The strains aren’t a secret. During a visit to India this weekend, a student asked Chancellor Olaf Scholz how it is to lead the three-way alliance. The Social Democrat laughed and said: “Well, I want to be very honest with you. The coalition government which I’m leading is not the easiest in the world.”
Speaking after Lindner’s event in Berlin, participants stressed that they expect the coalition parties to join forces and deliver.
“They need to work together — and I stress together — to make the right economic policy,” said Rainer Dulger, head of the BDA employers group. “Political posturing must now be followed by action.”
Tensions between the parties have been rising for months as budget constraints collide with a sputtering manufacturing sector that’s struggling with a slowdown in China and high energy and labor costs. Europe’s largest economy, which releases GDP data on Wednesday, has likely been in recession since April.
A survey of 25,000 German companies published on Tuesday showed that fewer firms are upbeat about their business.
“We aren’t just dealing with an economic crisis, but also a persistent structural crisis in Germany,” said Martin Wansleben of the DIHK Chambers of Industry and Commerce. “The feedback from companies supports fears that things could get even worse” in 2025, he said.
Anxiety over living standards has fueled anti-immigrant sentiment and caused all three parties to lose support in polls compared with the last election in 2021. The FDP’s current support would put it at risk of failing to make it into the lower house of parliament.
With their fortunes fading, the ruling parties have been using their platform in the government to burnish campaign profiles. Scholz caught his partners wrong-footed about two weeks ago when he surprisingly announced an “industry pact” with business leaders helmed by himself. Both Habeck and Lindner were unaware, although they had pushed Scholz to take further steps to ease the burden on businesses in recent months.
Habeck reacted to Scholz’s proposal a few days later by floating the idea of subsidizing as much as 10% of company investment. Lindner, a fiscal hawk, dismissed the idea as a potential violation of European Union restrictions on state aid.
The FDP leader then let his parliamentary caucus schedule a meeting with small and medium-sized companies and business associations not invited to the chancellor’s summit. That meeting takes place just hours before Scholz hosts union and manufacturing representatives on Tuesday.
“There is no lack of proposals,” said Jürgen Goldinger, chief executive officer of German ventilation specialist Maico Holding and part of a business delegation that traveled to India last week with Habeck. “It seems difficult to reach a consensus across party lines and then find a pragmatic way to make decisions.”
The partial dysfunction creates a power vacuum in Germany that threatens to ripple across Europe as the region seeks to uphold support for Ukraine’s defense against Russia. But the stakes are high for any party that pulls out of the coalition.
Although Scholz’s government is deeply unpopular, Germans value stability and the political damage for pulling out of the coalition could be severe. The FDP is seen as the weakest link, but with support hovering below the 5% threshold to get into the Bundestag, losing the finance ministry as a platform for the party’s fiscally prudent policies could be costly.
Aside from political tactics, more trouble is brewing for the coalition. The 2025 budget must be approved by lawmakers in the German parliament in about two weeks, but there’s still a shortfall of as much as €10 billion ($11 billion) to close. Keeping the country’s net borrowing limit enshrined in the constitution is Lindner’s top priority and conflicts with the economic incentives sought by Habeck.
“We are now in the middle of what I call the autumn of decisions,” Lindner said last week in Washington after announcing that there was no scope for further spending and that even more consolidation was needed.
Another stumbling block could once again come from Germany’s top court, which triggered a government crisis in November last year by decision that special off-budget funds were unconstitutional. The judges of the federal court are expected to rule this year on a levy for high earners, the so-called solidarity charge, which could potentially spark a new financing crunch for the government.
Asked whether the coalition will still celebrate Christmas together, Scholz wryly responded during his India trip: “Christmas will always be celebrated.”
--With assistance from Sonja Wind.
(Updates with Dulger in seventh paragraph)
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