On Sunday, Germany’s voters will elect a new government. Polls indicate that the once mighty Social Democratic Party (SDP) will be reduced to fighting the Greens for third place while the right-wing Alternative for Germany (AFD) will finish second behind the more “moderate” Christian Democrats (CDU). With the war in Ukraine at a turning point, the result matters beyond Germany, and even Vice President J.D. Vance has found himself caught up in the campaign.
The proximate cause of Sunday’s election is the collapse of the governing coalition of the SPD, Greens, and free-market Free Democratic Party (FDP) following disputes over economic policy. The ultimate causes are several, and a leading one is Germany’s stagnant economy. It offers a stark warning to the United States and any country tempted to sacrifice its economy in pursuit of “green dreams.”
Green Dreams
Until recently, this would have seemed incredible. In the early 1990s, Germany’s per capita Gross Domestic Product (GDP), adjusted for inflation and differences in living costs, was equal to that of the United States, an incredible achievement for a country whose economy was obliterated during World War II. The jewel in West Germany’s economic crown was its manufacturing sector, which specialized in high-quality products made by a highly capitalized, highly productive, highly paid workforce. This accounted for 19.9 percent of German GDP in 1997 compared to 16.1 percent in the United States: By 2021, while manufacturing had fallen to 10.5 percent of United States’ GDP, it still accounted for 18.7 percent in Germany.
The absorption of East Germany, historically poorer than the west and relatively impoverished further by decades of communism, was a strain, and German per capita GDP reached near parity with France and Britain by the mid-2000s. Then its relative performance improved thanks to the introduction of a currency shared with weaker economies like Greece and Italy which dragged the foreign currency price of German exports down. By 2020, Germany’s per capita GDP was about $12,000 to $10,000 higher than that of France or Britain.
But German policymakers were determined to fight climate change; indeed, they opposed not only fossil fuels but anything that wasn’t wind or solar. In 2011, Chancellor Angela Merkel (CDU) accelerated the end of nuclear power. Those renewable sources of energy weren’t scaling up fast enough to fill the gap, but gas could be imported from Russia while the wait for renewables went on…and on. Even after Russia invaded Georgia in 2008, German leaders went ahead with Nord Stream 1 which piped natural gas from Russia and even following Putin’s first invasion of Ukraine in 2014, Berlin’s policymakers went ahead with Nord Stream 2 which began construction in 2018.
In July 2017, Merkel denounced President Trump’s approach to fighting Climate Change at a meeting of the G20 while, at the same time, she was turning Germany into a Russian client state with her own energy policies. In September 2018, Trump hit back, telling the United Nations General Assembly that “Germany will become totally dependent on Russian energy if it does not immediately change course.” In response, the Washington Post reported, “German Foreign Minister Heiko Maas could be seen smirking alongside his colleagues.”
Russia’s invasion of Ukraine in February 2022 vindicated Trump and wiped the grins off the faces of Maas and his colleagues. Moscow cut off natural gas supplies to Germany and prices skyrocketed for gas and for electricity generated from gas, both key inputs for energy-intensive industries such as steel, fertilizer, chemicals, and glass. Germany had to turn to liquefied natural gas (LNG), super-cooled and imported by ship from Qatar and the United States, all of which cost more than pipeline gas. Electricity now costs industrial users in Germany an average of 20.3 euro cents per kilowatt hour, while its competitors in China and the United States face costs equivalent to just 8.4 euro cents.
Germany’s political class thought that it could have an industrial economy based on pre-industrial sources of energy like wind and solar. For a time, Russian natural gas allowed them to live that fantasy and lecture those who did not share it. The fantasy is now over, and it turns out that switching your economy to pre-industrial energy sources switches you back to a pre-industrial economy. Germany’s energy-intensive industrial production is now at a level even below those it fell to during the pandemic.
The country hasn’t seen significant economic growth in five years and 2024 was the second year in a row where Germany’s economy actually shrank. In January, the government cut its 2025 growth forecast from 1.1 percent to 0.3 percent and the number of unemployed hit almost three million, a rate of 6.2 percent.
Political Realities
The combination of left and right parties that formed a government after the 2021 elections was doomed to struggle in such circumstances.
In November 2023, Germany’s Federal Constitutional Court lit the fuse to its eventual explosion when it declared the government’s reallocation of unspent debt proceeds to its climate action budget unconstitutional. To fill the resulting €60 billion shortfall, the government attempted to fill this gap by, among other measures, raising taxes on farmers, prompting widespread protests. In three state elections in September 2024, the coalition parties performed poorly while AfD and the left-populist Sahra Wagenknecht Alliance (BSW) made significant gains.
On November 1, FDP leader and finance minister Christian Lindner called for tax cuts and a halt in new regulations, and opposed new spending, including on action against climate change. The SPD and Greens branded this “provocation” and on November 6, Chancellor Olaf Scholz (SPD) dismissed Lindner, and the FDP quit the coalition, leaving a minority government.
On December 16, Scholz called (and then lost) a vote of confidence, prompting Sunday’s vote.
Lessons for America
In recent years, policymakers across the West, including the United States, have argued for and enacted costly policies to shift from cheap and reliable energy sources to expensive and unreliable ones. Voters have been told that, if everything goes right, not only might this come at no economic cost, but it might even usher in some “Green Revolution.” The fate of Germany’s economy — its entirely self-inflicted crippling in pursuit of a fantasy — exposes the folly of this argument. No government should follow its example and anyone who says it should ought to be dismissed as a crank.
There is another lesson, perhaps a deeper one. The economic situation has created a situation where AfD can thrive. If they do well, Russia will be blamed and so will populists and populism generally. But it wasn’t populists who crippled Germany’s economy. It was its “moderate” elites, people like Merkel, who did that. If AfD performs well on Sunday, it is to those “moderates” and their disastrous, immoderate policies, that it will owe its success.
