(Bloomberg) -- German parties should quickly form a new government after Sunday’s election, to help prevent the economy failing to expand for a third straight year, according to Bundesbank President Joachim Nagel.
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“There’s a clear government mandate and a likely option for a coalition,” Nagel said Tuesday in Frankfurt. “Germany needs an effective government as soon as possible.”
While a slight recovery is still expected over the course of 2025, another year with no growth can’t be ruled out, he said in a statement accompanying the Bundesbank’s annual report.
“This makes it all the more important that the new Federal Government swiftly takes effective measures,” he said.
The comments come just two days after a vote from which conservative leader Friedrich Merz emerged as the winner. His CDU/CSU bloc will probably join a coalition with the Social Democrats.
While many economists and companies hope this will bring more growth-oriented policies capable of helping drag Europe’s largest economy out of its rut, others remain skeptical.
A key question is whether the new government can overhaul the country’s debt brake — a limit on state borrowing. The Bundesbank is set to make a proposal on the issue in less than two weeks.
While that will still feature the debt brake as an anchor of fiscal stability, the aim is to “give ourselves more leeway when it comes to mastering those future challenges, both in terms of defense but also for investments,” Nagel said. A special fund for the country’s armed forces could be part of such a framework, he said.
The prospects for 2025 are subdued, despite some recent green shoots such as an unexpectedly strong improvement in private-sector activity.
Nagel sees Germany’s economy “in a state of stubborn stagnation,” that can’t be explained by cyclical headwinds alone. “Structural problems play a key role,” he said.
He cited high energy prices, demographic change, bureaucracy and growing competition from emerging-market economies among the challenges. At the same time, there are risks from international trade and geopolitics, he said.
Nagel also stressed Germany’s strengths, which “should be leveraged and expanded upon.” The inlcude stable institutions, financially sound and often highly innovative firms and a highly skilled and dedicated workforce.