BERLIN — Germany’s economy is flatlining, and Chancellor Friedrich Merz is blaming everyone but himself.
The chancellor was elected on a promise to jolt Germany’s enervated economy back to life, but one year on, he and his conservative-led government have failed to do so. As Merz’s dismay grows and his popularity plummets, he is increasingly lashing out at factors beyond his immediate control — from the war in Iran to what his government casts as heavy-handed regulation and waste in Brussels.
The chancellor this week chose an unlikely place to vent his frustration: on the stage of a high school auditorium in his home region in rural western Germany.
A subdued Merz told students the U.S. had been “humiliated” by Iran’s regime, lacks a strategy for ending the war, and has left peace talks empty-handed — causing significant economic damage to Germany given the resulting surge in energy prices.
“It’s costing us a lot of money — a lot of taxpayer money — and it’s costing us a lot of economic strength,” Merz said. “This war against Iran has a direct impact on our economic performance, and for that reason it must be brought to an end as soon as possible.”
It was Merz’s fiercest attack on Donald Trump’s handling of the Iran war yet, and it prompted rhetorical retaliation from U.S. President, who, in a Truth Social post Tuesday, claimed the chancellor is “OK” with the regime in Tehran having a nuclear weapon. “He doesn’t know what he’s talking about!” Trump wrote. “No wonder Germany is doing so poorly, both Economically, and otherwise!”
For Merz, who has sought to keep friendly relations with Trump, the rebuke likely reflects a clear political calculus. Trump and the war are deeply unpopular in Germany, making them expedient targets for the chancellor.
The same logic underpins Merz’s attacks on Brussels: Railing against red tape — from AI rules to public spending — plays particularly well among business leaders at home while shifting blame outward.
At a trade fair in Hannover earlier this month, the chancellor said he would push to “exempt industrial AI from the current regulatory straitjacket” imposed by the EU. Merz’s conservatives have also launched an effort to get European Commission President Ursula von der Leyen to slash regulations more aggressively, while the chancellor has also pushed back strongly against her budget plans, calling instead for “across-the-board cuts in all sections” of the EU executive’s proposal.
Merz’s attacks on Brussels are part of a bid to placate German industry leaders, who blame excessive EU regulation for a loss of competitiveness. Four in five German firms complain that bureaucracy has increased over the past three years, according to a survey of 1,000 companies by the German Economic Institute. More than 90 percent want EU rules scaled back.
“Only as a strong economic hub can we be a strong international player,” Stefan Berger, a German conservative MEP focused on the economy, told POLITICO. “In this situation, it makes sense to look to Brussels, scrutinize some existing regulations and cut through unnecessary red tape so that European companies can focus more on production and less on paperwork.”
Merz’s attempts to pin the blame abroad have a great deal to do with his limited domestic options and sinking popularity. The chancellor this week, for the first time, fell to last place in polling firm INSA’s popularity ranking of Germany’s 20 most prominent politicians. Meanwhile, only 15 percent of Germans said they are satisfied with Merz’s centrist coalition, according to Germany’s benchmark ARD-DeutschlandTrend poll released early this month, a new low.
As dissatisfaction with Merz’s government grows, the far-right Alternative for Germany (AfD) party — which has been hitting the government hard on the economy and high energy prices — has surged to new heights in polls, and is now the most popular force in German politics, according to POLITICO’s Poll of Polls.
‘The cause lies with us’
The trouble for Merz is that he has no easy domestic political options for immediately stimulating Germany’s export-oriented economy in the face of strong global headwinds that have hampered growth, from the conflicts in Iran and Ukraine to Trump’s trade wars. Last week the German economy ministry slashed its growth forecasts for 2026 and 2027, citing the fallout of the war in the Middle East.
A historic move by Merz and his allies to unleash hundreds of billions of euros in borrowing for infrastructure and defense last year — widely referred to as an economic “bazooka” at the time — failed to produce the economic blast many in his centrist coalition had hoped for.
That’s partly because Germany’s government has redirected the bulk of funds originally earmarked for infrastructure into covering budget gaps, according to reports last month from two leading research institutes. At the same time, defense spending doesn’t stimulate economic growth to the same degree as other forms of investment.
Germany’s coalition also can’t borrow its way out of the economic rut, and in fact has been slashing costs. On Wednesday, Finance Minister Lars Klingbeil is set to present his draft 2027 budget framework for which he had to find cuts across ministries to close a budgetary gap of around €34 billion.
That leaves Merz facing the large structural reforms he and his center-left coalition partners in the Social Democratic Party (SPD) have vowed to undertake, but have repeatedly delayed. Those include far-reaching changes to control spiraling health care costs, and overhauls of the tax and pension systems to ease the financial burden on employees and businesses.
Merz’s cabinet is expected to agree on the first of these packages, the health care reform, on Wednesday, but his ideologically conflicted coalition remains at odds over key aspects of the tax and pension overhauls. That’s particularly the case after the SPD suffered heavy losses in two recent state elections, which ramped up pressure on party leaders to retrench and refocus on their base.
“I will block any attempts to roll back workers’ rights,” Bärbel Bas, one of the SPD’s national leaders, said this week.
The spending plans and the reform packages still require parliamentary approval, with lawmakers facing thorny negotiations over the coming months. The stakes are high: Germany’s previous left-leaning government led by former Chancellor Olaf Scholz collapsed in 2024 over spending disagreements and budget constraints.
While German business leaders broadly support Merz’s effort to scale back EU regulation — and see eye-to-eye with the chancellor on the need for a U.S.-Israeli peace deal with Iran to bring down energy costs — many still blame domestic politicians for repeatedly failing to understake structural reforms.
“We are no longer competitive as a business location,” Peter Leibinger, president of the Federation of German Industries business association, said earlier this month at the Hannover trade fair. Geopolitical developments like the Iran war didn’t cause the country’s economic malaise, they merely exacerbated it, Leibinger added.
“The cause lies with us,” he said.
Nette Nöstlinger contributed reporting.
