What’s at Stake in Germany’s Elections - Thomas Pueyo

Summary Who wins the German elections this Sunday could lead to a future where Russia invades the rest of Europe—followed by China invading Taiwan, or the US

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Forwarded this email? Subscribe here for more What’s at Stake in Germany’s Elections The future of Ukraine, of Europe, freedom of speech, and Germany’s economy Tomas Pueyo Feb 22   READ IN APP   Who wins the German elections this Sunday could lead to a future where Russia invades the rest of Europe—followed by China invading Taiwan, or the US co-opting Greenland. A world where speech is only free when vetted by the government; a world where Germany becomes a poor country, the laughing stock of the world. A world where the values of the West are thrown to the ground and trampled. What are the stakes? Who is most likely to win? What does that tell us about the future of Germany, Europe, and the World? Next up in Uncharted Territories: the future of Germany, the secret behind Asia’s economic miracle, the bull case for Tesla, and the future of AI. To receive new posts and support my work, consider becoming a free or paid subscriber. Upgrade to paid Quick Primer on German Elections and Parties From 2005 to 2021, Angela Merkel’s center-right CDU (Christian Democratic Union) led all German governments, in partnership with different parties. It had three coalitions with the center-left SPD, one with the liberal FDP (Free Democratic Party), and one with the Bavarian sister party CSU (Christian Social Union).¹ When she stepped down, the next government was the “traffic lights coalition” formed by the red SPD, the yellow FDP, and the Greens. The tension between these parties ended up triggering a snap election, which will be held tomorrow. It is the policies of Merkel’s CDU and the traffic light coalition that have led Germany to face the risks of today. The World’s Stakes in This German Election 1. The Russian Threat Russia invaded Ukraine unprovoked, to grab its land and people.² Until that invasion, the world had left imperialism behind, replaced by a system where every country tries to improve itself rather than steal from the neighbors. If Russia succeeds, it’s only a matter of time until it continues its campaign. Starting with the Baltic Countries, maybe Finland after that. Then, definitely Poland, whose people Putin hates as a competitor of Russia. The dream is to recreate the Soviet Union, and in case Germans don’t remember, that includes a piece of their country. And if they don’t remember well, this is the impact of Soviet management, 35 years after reunification: Before WW2, the eastern side of Germany was more developed than the west. It is the Russian influence over 45 years that has led East Germany to be backwards compared to the West. Germany should fend off Russia to make sure its influence never even gets close to its borders. When is it easier to fight your enemy: When it’s weak, mired in a neverending war with a strong neighbor that shares your values? Or when each one of your neighbors has been made to bend their knees, one by one, until you’re the last one standing? This reminds me of a quote that Germans know all too well: First they came for the socialists, and I did not speak out—because I was not a socialist. Then they came for the trade unionists, and I did not speak out—because I was not a trade unionist. Then they came for the Jews, and I did not speak out—because I was not a Jew. Then they came for me—and there was no one left to speak for me. —Martin Niemöller Except this time: First they came for the Georgians, and I did not speak out—because I was not a Georgian. Then they came for the Crimeans, and I did not speak out—because I was not a Crimean. Then they came for the Ukrainians, and I did not speak out—because I was not a Ukrainian. Then they came for the Balts, and I did not speak out—because I was not a Balt. Then they came for the Poles, and I did not speak out—because I was not a Pole. Then they came for me—and there was no one left to speak for me. In graph form: But Moscow can move east with its forces. Source. Germany has made amazing strides, nearly doubling its defense budget in the last decade, now passing the threshold of 2% of GDP spent on the military, as required by NATO. Via this But it’s not enough. The target of 2% of GDP means ~€90B per year. But the ongoing military budget is ~€52B, 40% short of what is needed. The €38B gap is made up in part by a special fund of €100B that will run out in the next couple of years. It’s hard to make this allocation indefinite, because the German Constitution limits structural deficit to 0.35% of GDP—the famous debt break. And the remainder of the military budget was made up of obscure accounting allocations from other ministries like the foreign service. Source Some German parties say Germany should not increase military spending to 2%. Others say they should, like the probable winner of the election, the union of the CDU and CSU, which I’ll therefore call Union.³ Its leaders think the 2% threshold is a lower bound, not an upper bound. How will Germany get there? If it’s through debt, it means amending the constitution.⁴ Otherwise, it should be achieved by limiting other types of spending. No omelet without breaking eggs. Whether it’s through more debt or less social spending, what’s clear is that Germany does need to get to the 2%. More importantly, it needs to spend the vast majority of that helping Ukraine. It is not. As a share of its GDP, Germany is only the 16th in terms of bilateral aid allocated to Ukraine. If it doesn’t ramp that up immediately, in a few years it might find Putin at its doorstep. 2. World Order Ukraine, of course, doesn’t just matter for Europe. It matters for the world. Russia has revived an imperialism that was mortally wounded in 1945. China is observing intently: Its Georgia is Taiwan. But China won’t stop there: The Koreas, the Philippines, Okinawa, Vietnam… all appear on the menu. If China sees it’s OK to take over your neighbor, it will do it. This is the lens to use when considering Trump’s crazy talk about making Canada the 51st state, co-opting Greenland, taking back the Panama Canal, or the stupid and childish renaming of the Gulf of Mexico. Following this logic, if every country claimed what it thinks belongs to it historically or geographically, we would have Italy claiming the entire Mediterranean, Spain claiming Latin America, Mongolia claiming half of the world, and the UK all of it. Is this really the world we want to live in? A world where progress is measured in death, conquests and who is the heaviest gorilla? Or do we want a world like the last few decades, where the life of every person on Earth gradually improved through peace and trade? As the richest country in Europe, and a former Russian colony,⁵ Germany is in the best position to nip this trend in the bud: If Russia is humiliated on Ukrainian soil, its imperialist instincts will be chastised on the world stage, and peace and prosperity might keep flourishing into the future. If not, we might return to the 20th century. 3. Germany’s Economy It’s easier to spend money on the military when your economy is growing healthily. Germany’s is not. In fact, it suffered a recession in 2023 and 2024. Source The business mood is “as bad as I have ever seen it”, according to Peter Leibinger, the new leader of the Federation of German Industries. The main concerns are: Red tape High taxes Costly social security contributions Energy costs Competition from China And the part of the economy that is suffering the most is industry. The CEO of Thyssenkrupp, a steelmaker, has said Germany is “in the midst of deindustrialisation”. Indeed, Germany’s manufacturing base is crumbling. Red tape can certainly be improved, and should be, at the German and EU levels. Social security contributions are probably hard to change, yet they account for the lion’s share of government spending. So how can it then reduce taxes, while at the same time increasing military spending? Taxes are unlikely to go down by much. Energy, however, is a lever the government has to improve the economy: The sectors that employ lots of energy, like steelmaking, fertilizer production, or paper manufacturing, account for 16% of German industrial output, but consume almost 80% of industrial energy. In the case of fertilizer, the cost of energy is 90% of its total costs. You can imagine what happened when energy costs shot up when Russia invaded Ukraine, or even more recently: €150 per MWh in Germany in January 2025. Compare that with the US’s $40-80.⁶ If the German government was able to reduce energy costs, it could save about 15% of its industrial output. And it can do that without hurting the environment. 4. Good Environment AND Good Economy Let’s take the fertilizer example. With 90% of costs coming from energy, importing fertilizer is basically importing energy in solid form. Today, German fertilizer industries are forced to consume expensive German electricity and then buy expensive CO2 offsets. Given these costs, their prices go up. Meanwhile, foreign competitors like Chinese firms consume dirty coal energy and don’t buy offsets, so their fertilizer costs are cheaper, they can undercut German competitors, and run them out of business. At that point, Germany is basically importing dirty Chinese energy while killing its homegrown industry. Does that sound intelligent to you? Luckily, the EU has thought of that and has approved the Carbon Border Adjustment Mechanism, a policy to ensure that imported goods also account for carbon emissions in their price. This tool will gradually take effect over 2025 and 2026. The next German chancellor should accelerate this as much as s/he can. But there’s an even better solution: cheaper energy. Now, renewables are gaining momentum in Germany. That’s good! As I’ve shared, wind is good, and solar is not just better, but will get nearly 10x cheaper in the coming decade. But you can see fossil fuels still make up a huge share of Germany’s energy. Meanwhile, nuclear is the best source of energy: safe, clean, emits the least CO2, causes less radiation than a banana, sustainable, reliable… And in Germany, it is also cheap, because its nuclear power plants are already amortized. Yet somehow the German watermelons led by the Greens decided to close Germany’s nuclear power plants against the will of the people. Those who support nuclear energy outnumber its detractors three to one. Source. Meanwhile, Japan has reversed course and now supports nuclear energy, just like the US, the Netherlands, Italy, and more recently Spain. The president of the EU commission, Ursula Von der Leyen, recently declared that the EU should not close nuclear power plants because they’re one of the cheapest and best ways to reach net zero (CO2 emissions). Yet somehow, the German Greens dumbly continue to oppose nuclear power. If they didn’t: CO2 emissions would dwindle in Germany, improving global warming Germany would be less dependent on foreign energy Energy costs would plummet German industry would grow back The German economy would grow again This would liberate funds to tackle other challenges, like military support for Ukraine Could we reopen some nuclear plants? Absolutely. We just need a commitment to open them for at least a decade, or operators won’t be interested. Too much hassle. The leader of the front-running party in Germany, the CDU, says he will reopen nuclear power plants if he wins. That would be good: Germany is the last big country left to reverse course on nuclear. If it does, the country will improve, and the world will get a strong signal that nuclear is back. 5. Immigration Last week in Munich, just before Vice President of the US JD Vance gave a speech complaining about immigration in Germany, an Afghan rammed into a crowd with his car, injuring 39 people, two of whom are still in critical condition. Just two weeks earlier, another Afghan stabbed a toddler and an adult to death, injuring two others. Two days ago, a person who doesn’t speak German stabbed a tourist in Berlin’s Holocaust Memorial. A Saudi rammed into another crowd in a German Christmas market, killing six and injuring 200. Just around that time, a study appeared claiming this: Migration to Germany does not lead to higher crime rates at the places of immigration. When looking at the data, the methodology makes no sense.⁷ Also, the crime rates of immigrants are not only due to the fact that they tend to be younger and more male. The country of origin, however, does matter: Source This type of crime might not be a problem when there are a handful of refugees. But about 17% of people who live in Germany were born abroad—and this number doesn’t count the children of immigrants, who don’t usually cause much less crime than their immigrant parents: German politicians have at least two paths forward. One is to hide and ignore the problem. This is exactly the type of rhetoric that angers people, who then go on to vote for the right-wing AfD party. The other is to handle the situation like the Swedes: I believe immigration is net positive. But certain immigration is better than other. Even more importantly, it’s impossible to figure out which immigration is better if the data to analyze these issues is not available, or if the speech to discuss these problems is muffled. 6. Freedom of Speech This topic is extremely relevant, too, but I will expand on it next week. The gist here is that Germany is curtailing freedom of speech in a more and more aggressive manner every day, and this has serious consequences for the country’s future. Who Will Win the Elections? This is the projection of Germany’s federal election results this Sunday