Conservative leader’s victory sparks hope, but Germany’s aging crisis may derail economic revival

Friedrich Merz’s victory in the German election has raised hopes that the 69-year-old former corporate lawyer will be the catalyst for reviving Germany’s stagnant economy.

However, experts warn that the country’s aging population and structural issues could make such optimism overly ambitious, Caliber.Az reports per foreign media. 

Merz, eager to form a government quickly, has signaled a willingness to soften his stance on borrowing to rebuild Germany’s military. Despite this, many economic analysts believe that a post-WWII-style economic boom or a revival similar to the early 2000s growth is highly unlikely due to demographic shifts and other persistent challenges. Germany is grappling with significant barriers to growth, including outdated infrastructure, high energy costs, rising protectionism, and low productivity. 

The competitive rise of China has also placed additional strain on Germany’s once-dominant industrial sector. While demographic changes remain a crucial issue, the aging population could further exacerbate labor shortages and reduce working hours, unless immigration levels remain high—a trend that is uncertain, particularly with the growing influence of the far-right Alternative for Germany (AfD), which could discourage skilled workers from coming to the country. These demographic shifts will increase pressure on Germany’s federal budget and social security system, intensifying political and generational divides over how resources are allocated. 

Voter demographics show a marked shift, with 42 per cent of eligible voters now aged 60 and above, compared to just 26 per cent in 1990. More than half of older voters have supported conservative parties, including Merz’s CDU/CSU alliance, which may limit his ability to implement tax cuts and boost Germany’s attractiveness to businesses. Merz has acknowledged these economic challenges and outlined an “Agenda 2030” to address them. His proposals include tax cuts and incentives to encourage the elderly to remain in the workforce, alongside efforts to reduce bureaucratic red tape and increase business investment. 

However, Merz has yet to provide clear details on how these tax cuts will be funded, and his plans are likely to face resistance and compromise, particularly from the Social Democrats, who hold differing views on fiscal policy. Germany’s economic growth for the remainder of the decade is projected to be sluggish, with estimates predicting an annual growth rate of just 0.3-0.4 per cent, significantly lower than the 1.4 per cent average growth from 2000 to 2019. 

The country’s aging population will further strain the pension system, as 5.2 million Germans are set to reach retirement age during this period, while only 3.1 million young people will join the workforce. The increased demand for healthcare services and rising costs for pensions will place additional burdens on the federal budget. Pensions already account for more than 20 per cent of government spending, and Merz’s ambitious fiscal goals could face difficulties in light of this growing demand. 

Although Germany’s income taxes remain moderate by international standards, social insurance contributions, including pension, unemployment, and healthcare insurance, make the overall tax burden one of the highest in the OECD, particularly for childless singles. 

By Naila Huseynova