Friedrich Merz, the future German Chancellor

Introduction

 

Friedrich Merz (born 3 July 1964 in Beelen, Germany) can be described as a traditional German democrat, influenced by three fundamental orientations of German political life over the past 80 years:

• European integration

• The transatlantic alliance

• The social market economy.

 

The conceptual foundation of German Christian democracy is very broad compared with the other democracies in Europe: it originates in the need, after the Second World War, to create an agreement between the Catholic and Protestant political factions; thus, reference is still made to social, liberal and conservative values. Indeed, Protestants were liberal and conservative, while Catholics, also liberal, put more emphasis on social values.

 

Friedrich Merz, who comes from a very traditional region of Germany, is a man who was politically formed during the 1980s, a period when the two Germanys (East and West) and the Soviet Union in its then form still co-existed. Younger generations are not aware of the many similarities between that period and the one we are currently living through. There are, however, major differences in how the political institutions (Parliament) functioned in each of these two eras.

 

Friedrich Merz and the German political context

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When we talk about Christian Democrats in Germany, we naturally think of Angela Merkel. It should be noted, however, that she was European out of necessity, whereas Friedrich Merz is European out of conviction.

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He began with a remarkable career in the political world before joining the financial group BlackRock (a renowned asset management firm) as head of its supervision of Germany, which allowed him to become familiar with how financial markets work.

After returning to politics, he had the opportunity to show his tenacity: it was indeed only on his third attempt that he managed to become Chairman of the CDU (on 31 January 2022, re-elected in May 2024).

 

The CDU is a party that brings together several ideological currents:

1. Traditional conservatives;

2. Economic liberals;

3. Centrist moderates;

4. And finally, conservative environmentalists.

 

Friedrich Merz belongs to the conservative wing, quite far from the party’s left wing. He showed his skills while in opposition, by quite deftly managing to divide the coalition, arguing that the government’s debt policy was not justified, which created internal tensions so strong that the coalition ended up imploding.

 

Unlike the current Chancellor Scholz, he is a born orator, as could be seen in the European Parliament.

 

He is also in the habit of acting fast, which has advantages but also drawbacks. And of taking risks: for example, in his negotiations with the Social Democrats on infrastructure investment, he made a fairly quick calculation to propose an overall envelope of €500 billion. Or again, for the defence spending budget, which will rise from €100 to €150 billion a year.

He therefore has a personality quite different from that of the current Chancellor, who is very cautious in his policy towards Ukraine, always taking care not to diverge from the positions of the United States, and who refused to allow German Leopard tanks to be made available to the Ukrainians without American agreement, something the future Chancellor Merz intends to do.

 

The 3 key figures in Germany at present

 

Bearing in mind that Germany’s problems and the major European geopolitical questions are very closely linked, there are currently 3 personalities in Germany who will play very important roles at the level of that country (and of the EU):

 

1. Ursula von der Leyen (CDU - Christian Democratic Union): born in 1958 in Belgium, President of the European Commission since 1 December 2019 and the first woman to hold that post, having previously held various ministerial portfolios under Angela Merkel;

2. Friedrich Merz, the next Chancellor (CDU);

3. Manfred Weber, chairman of the European People’s Party (EPP) group in the European Parliament.

 

The results of the European elections in June 2024 changed the distribution of power in the European institutions: the Liberals and the Greens lost some fifty seats and the right gained roughly seventy.

 

In practice, the European People’s Party (EPP) group - the Christian Democrats in the broad German sense - currently controls the Centre, while there is no longer a majority either on the left or on the right, and is therefore in a position to take the most important decisions, which gives a very important role to the 3 people mentioned above.

 

The problems to which F. Merz will have to find solutions

 

Europe’s geopolitical environment, and therefore Germany’s, has fundamentally changed, and for Mr Merz the difficulties facing German industry (which in 2025 will be in recession for the third year running) are inseparable from the problems arising more broadly for Europe:

 

1. The price of replacement energy (mainly LNG) as a consequence of the sharp reduction in (direct) imports of Russian gas and oil ;

2. The aggressive posture of Russia towards its neighbours and, more generally, towards the democratic systems of Western Europe, which it perceives as a threat;

3. The United States’ unwillingness to continue to take on (for free) the conventional defence of Europe, and the uncertainties surrounding the solidity of the US nuclear umbrella for Europe, resulting in the fundamental overhaul and very significant increase of the spending budgets of all European countries;

4. The difficulties encountered by the German automotive industry, and more generally the European one, a traditional mainstay of its exports, in the conversion from combustion engines to electric ones and the resulting losses of competitiveness against extremely aggressive Chinese competition;

5. More recently, the economic war (via customs duties) launched all-out by the American administration of President Trump.

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We believe that the period we are living through is quite similar to the years 1945 (as a reminder) and 1989: moments of profound and rapid change which must be faced with all the problems that follow.

These subjects deserve to be addressed in more detail.

 

The Russian threat and US protection for Europe (nuclear shield)

 

This threat is not limited to Ukraine. Our infrastructure is also under threat, as can be seen from the (frequent) sabotage of undersea communication cables (the most recent: 21 February 2025 in the Baltic Sea). The European Commission has moreover announced a reinforced protection plan following a series of similar worrying incidents. It has also sent a report to NATO and the United States stating that it considers all the countries of the former Eastern Bloc that are now part of NATO and/or the European Union to be threatened with a retaking of control by Russia, as was the case in 1989: Russia, at the time still part of the Soviet Union, had adopted an ambivalent attitude towards its neighbours traditionally under its influence. With the fall of the Berlin Wall and the gradual collapse of the Communist bloc, Moscow tried to manage the democratisation and independence movements in several Eastern European countries (mainly Poland, Hungary and Czechoslovakia, where democratic reforms had been put in place).

Decisions will be taken to counter this threat at the next NATO summit, scheduled for the end of June.

 

It is interesting to take note of the positions of Stephan Miran (PhD in economics from Harvard, a student of Martin Feldstein - unlike Peter Navarro, who has no Harvard degree). He is an influential American economist, appointed by Donald Trump in December 2024 to head the White House Council of Economic Advisers during his second term. He developed a document of some forty pages (“A User’s Guide to Restructuring the Global Trading System”) aimed at explaining how to change the global economic regime, in 4 stages:

 

1. Use of customs duties (tariffs) as a strategic lever;

2. Controlled devaluation of the dollar in order to create comparative price advantages (the current fall is already 9%);

3. Reduction of dependence on imports (relocation of industrial production);

4. Reduction of the financialisation of the economy (concentration of capital on Wall Street, which diverts investment and brainpower away from the productive economy).

 

This strategic plan seems to be one that the current occupant of the White House wants to put in place (after a fashion).

 

It is therefore absolutely essential for Europe to have a credible nuclear deterrent. The Americans (VP J.D. Vance, and Pete Hegseth, the latter Defense Secretary in the Trump cabinet) have clearly said that they no longer intend to defend Europe conventionally. The United States now wants to focus on Asia, and this is no longer simply an intention as in the days of Barack Obama.

 

Chinese President Xi has reportedly asked his military to be ready in 2027 to invade Taiwan, that is, in 2 years’ time; in practice, this means the Americans must use this window to reorganise strategically. Pete Hegseth has communicated the new American positioning to all defence officials worldwide: it consists essentially of countering China, while accepting the risks that will then be taken in Europe, where militarily the Europeans are unable to handle more than one confrontation at a time; and this at a time when the share of European budgets devoted to defence is the lowest since the Second World War; when ammunition stocks are already depleted by what has been given or sold to Ukraine and Israel; and finally when the Chinese invest more than 10% every year in defence - which immediately raises the question of their attitude towards Taiwan.

But the problems are broader still: the Philippines, Indonesia and even Australia must also update their risk-taking in relation to China’s assertive hegemony.

As far as Europe is concerned, the Americans consider that, with 440 million inhabitants enjoying a very decent standard of living, Europeans must ensure their own conventional defence; while leaving uncertainty hanging over the unshakeable nature of the American nuclear umbrella that has protected Europe since the end of the Second World War. They decided from the outset to control the strategic aspects of defence themselves: intelligence, satellites and long-distance transport. In these areas, it is considered that we will need between 5 and 10 years to adapt and regain our independence.

Ukraine plays a very important role here because it ties down some 1.6 million Russian soldiers facing 0.8 million Ukrainian soldiers. It is therefore crucial to support Ukraine in such a way that Russia continues to be obliged to use significant resources in men and materiel to hold its positions, while Europe carries out the strategic redeployment mentioned above.

The Americans are currently consulting on whether they still want to hold the supreme command of the allied forces in Europe, and a decision on this should be taken in July 2025. If it is negative, we will no longer have a single command, because the Americans are not legally permitted to submit to a foreign command.

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In the meantime, Europe considers itself fairly well protected: in the North with Finland, which can mobilise 0.8 million soldiers, strong from its experience following the German invasion in 1940; the Swedes too, as a neutral country between 2 aligned Nordic countries. Likewise in the South, with the Turks, while in the Centre it is perhaps weaker; however, the Poles are now investing up to 5% of their GNP in defence.

It will therefore still take a few years before we can arrive at a concrete, operational and integrated whole.

 

Germany’s role is therefore very important, and Friedrich Merz’s decision to triple the defence budget comes just in time to build up industrial arms-production capacity. Mr Merz says he is ready to deliver the long-range missile defence system, which the previous government always refused; and that he intended to begin talks with

 

France and the United Kingdom to find a solution for “sharing” the nuclear weapons that these two countries possess.

 

Relations with the United States

 

The American administration of President Trump brings us decisions and counter-decisions every day. It is therefore very difficult to gauge the long-term consequences of this succession of inconsistencies. Nevertheless, one should not attach too much importance to these contradictions.

President Trump’s defence strategy comes from Mr Elbridge Colby (a 45-year-old Republican, who promises “to focus our defence policy on restoring peace through strength and always putting America first ” (source: ChatGPT). It must always be borne in mind that behind the “salesman Trump” lie the theories of his economic adviser Stephen Miran, already discussed above (see supra). And we are now seeing (with a certain dismay) this strategy being put in place through the Trump administration’s efforts urbi et orbi to diminish the influence of, if not muzzle, the media, universities, the judiciary and finally Congress.

 

The current American deficit is running at around 7% of the budget, and from there one can estimate that ¼ of their budget is financed by debt, which is a lot, and certainly a situation that cannot, by definition, last. Debt is now approaching the value of annual GNP, a situation similar to that found in France and Belgium.

 

In such circumstances, savings would be needed, but these are not a panacea for fostering the expected growth; and so the Americans have come up with a very creative idea, which consists simply of letting other countries pay for them. This would then mean that the policy of customs duties known as tariffs (1) is not transitory but permanent (underlying idea: tariffs pay the American debt). We also know that President Trump displays unbounded admiration for former President William McKinley (1843-1901). It was in that era that the latter had the running of the state financed by import tariffs, when income taxes did not yet exist. One can therefore reasonably think that while some tariffs will disappear, a 10% rate will remain in force for a while. But that is not all. Trump also wants to lower the value of the dollar

(2) to obtain competitive advantages (the dollar has already fallen in value by 9% since his arrival). And finally, why not strike a “deal” (3) whereby countries wishing to benefit from the American nuclear umbrella (which, in fact, costs a great deal) would be obliged to buy American debt for a period of (for example) 100 years at a fairly low interest rate. A similar arrangement was, moreover, put in place in Greece to bail it out (without going through a debt default), and by way of the European Union…

In June, at the NATO summit, we therefore run the risk that these somewhat scattered ideas will be brought together in a concrete plan and that the bill for American debt will be presented to the

“allies” of the Americans. However, they are already in the process of reacting by creating trade partnerships, some with Canada, some with Great Britain, but also much further afield with India (before the end of 2025) and Australia. We could thus create a multi-tier customs union, even if similar arrangements have been met with flat refusals by France. Germany is of course primarily interested, being the number one exporter in the European Union.

 

European competitiveness

 

To renew European competitiveness, we must start by achieving a standardisation of financial markets, and encourage the emergence of very large players. It is indeed difficult for a bank to finance a high-tech project whose value it lacks the skills to judge. In this kind of financing, 80% of projects are doomed to failure and only 20% to success. We must therefore also establish a banking union and finally manage to integrate 27 separate defence markets.

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Certain sectors, such as the automotive industry, are facing great difficulties. But Porsche (for example) has announced that it would invest in defence. For Germany (and for Europe), weakness in the automotive sector could therefore be offset by investments in the defence sector, where we will no longer invest €50M a year but €150M, including through cutting-edge sectors such as artificial intelligence.

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