Germany Political Risks Rise as Merz Faces Coalition Pressure

Political uncertainty in Germany remains elevated after a series of regional election setbacks intensified pressure on Chancellor Friedrich Merz and his governing coalition, with UBS economists outlining three possible paths for the government. Recent results have significantly weakened Merz’s CDU, while the Alternative for Germany (AfD) has strengthened its position.

The first scenario would see the existing CDU/CSU-SPD coalition continue under Merz. Despite the electoral losses, Merz has pledged to remain chancellor and pursue his economic reform agenda, while his party has so far continued to support his leadership.

A second possibility would involve replacing Merz with another CDU/CSU politician through a constructive vote of no confidence. This route would avoid an immediate national election but would require the CDU/CSU and its Social Democratic coalition partner to agree on a successor.

The third scenario would involve Merz seeking a confidence vote. Losing such a vote could open the way for an early federal election. However, Merz has rejected stepping down, while the AfD’s recent electoral gains could make coalition parties reluctant to face voters ahead of schedule.

The political turbulence comes as Germany’s economy is expected to recover from years of weak growth. UBS projects gross domestic product to expand 1% in 2026 and 1.5% in 2027, helped by a major fiscal package expected to contribute around 0.6 percentage points to annual growth in both years.

Under scenarios where Merz remains in office or is replaced without an election, UBS expects limited changes to Germany’s overall economic policy. Increased political pressure could encourage the government to prioritize fiscal stimulus, although structural reforms involving pensions, labor markets and bureaucracy could be diluted.

An early election would create greater risks for the fiscal expansion if the government loses its ability to approve the annual budgets required to implement planned spending.

Prolonged political uncertainty could also affect Germany’s influence over major European Union decisions, including the EU budget and the bloc’s trade policy toward China.