Scholz and Merz Take German Election Battle to Davos Crowd

(Bloomberg) -- The race to lead Germany is diverting through Switzerland, with a campaigning push in Davos set to showcase competing visions for how to revive Europe’s biggest economy.

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Both Social Democrat Chancellor Olaf Scholz and his rival, the Christian Democrat frontrunner Friedrich Merz, will seek the blessing of the global business elite within hours of each other at the mountain resort gathering of the World Economic Forum on Tuesday.

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The battle of ideas that will play out there is one of the most crucial this year for Germany and the region as a whole. Merz is likely to tout his plan for corporate tax cuts, in stark contrast to the debt-fueled investment push that Scholz is arguing for.

Their time-consuming pilgrimages to woo global executives mingling in the Swiss Alps highlight how central prospects for the struggling economy have become before the Feb. 23 election.

Just last year, former Finance Minister Christian Lindner was defiant in Davos, insisting Germany wasn’t Europe’s sick man but just “tired” and in need of coffee. Now, with persisting evidence that the region’s economic motor is stuck in first gear, and vulnerable to US tariffs from President Donald Trump, any pretense of business as usual is over.

German data just last week showed a second consecutive year of contraction in 2024, underscoring that point. A prolonged downturn in Chinese demand, an energy crisis, an ailing auto sector succumbing to job cuts, and the stalling of Scholz’s push to build up a semiconductor industry instead have left officials in Berlin reeling.

Europe as a whole has been struggling with competitiveness, investment and defense. Political turmoil in Germany and France has also robbed the bloc of a prominent national leader who is respected by peers and can shape the region’s agenda as Scholz’s predecessor Angela Merkel once did.

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“It’s for the German people to decide, but clearly the policy makeup of the previous administration needs to change,” BlackRock Inc. Vice Chairman Philipp Hildebrand told Francine Lacqua on Bloomberg Television in Davos. “Change will be a positive, and then we’ll see whether that change could be translated into European leadership.”

Merz, whose traditionally pro-business CDU/CSU bloc has a double-digit lead over Scholz’s center-left SPD in surveys, could get the warmest welcome, even if his own appearance at 6 p.m. local time isn’t on the forum’s main stage.

He is likely to use the opportunity to comment on Trump’s first day in office. The CDU leader, who was supervisory board chairman at Blackrock‘s German unit, has already expressed a decidedly more optimistic view of the new US president than the majority of Germans, calling him a “very predictable leader” with a clear agenda.

Europe will need to develop a common strategy in dealing with the new US administration, Merz said in a first reaction to Trump’s inauguration. “Here, Germany will need to take the responsibility of leadership in the European Union,” he told public broadcaster Deutschlandfunk Tuesday morning before his departure to Davos.

Merz’s policy platform to kick start the economy — entitled “Agenda 2030” to echo former Chancellor Gerhard Schroeder’s growth reforms earlier this century — includes a higher threshold for income tax and a lower levy for companies.

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Scholz slammed that position this month, saying that ordinary people will have to foot the bill by suffering cuts to public pensions and care.

Like Lindner, the chancellor has previously put on a brave face in Davos. As he turned up in 2023, he casually insisted the country would avoid a recession. The economy barely did so and ultimately ended that year with lower gross domestic product.

The pitch the chancellor will make at 2 p.m. in Davos is for Germany to stoke an investment boom by loosening its strict limits on borrowing. He favors using a debt-financed €100 billion ($103 billion) fund to boost public and private investments for infrastructure, and introducing a “Made in Germany” tax rebate for corporate capital expenditure.

Scholz also wants to strengthen domestic demand by lowering the tax burden for 95% of households, financed by higher taxes on the very rich, and to increase child benefits, reduce sales tax for basic food products and to bring in a purchase premium for German-made electric vehicles.

While he argues that Germany’s debt at just 62% of GDP is very low compared to peers, Merz insists that the country’s constitutionally enshrined brake on borrowing shouldn’t be compromised.

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What Bloomberg Economics Says...

“What all German election programs have in common is a lack of details of how the promised reforms can actually be financed, given the current economic downturn and compliance with the debt brake.”

—Martin Ademmer, economist. For more, click here

For Holger Schmieding, an economist at German bank Berenberg, the corporate elite would probably rather have a mix of each side’s policies.

“For companies, lower taxes, fewer regulations and better incentives for more work are more important than the promise of debt-financed investments,” he said. “However, many companies are also in favor of loosening the debt brake somewhat.”

The exit of Lindner’s Free Democrats from the government over that latter issue was what prompted the early election.

Scholz’s remaining coalition partners, the Greens, support a loosening of the debt brake. Vice Chancellor Robert Habeck from that party will speak on a panel in Davos on Wednesday.

Absent, but very much a presence in the election, is the far-right Alternative for Germany. That party has drawn the limelight by winning the endorsement of Elon Musk — and the attendance of its co-leader Tino Chrupalla at Trump’s inauguration.

Given that whoever wins the election will almost certainly need at least one coalition partner, the prospect of a negotiated outcome incorporating parts of each platform is likely. How to address the existing straitjacket on the public finances may prove most crucial of all.

“While it is true that the SPD and Greens want to reform the debt brake, it is unclear whether they could get the needed two-third majority” in parliament, said Dirk Schumacher, an economist at Natixis in Frankfurt. “But it is arguably even less clear how the CDU/CSU will finance the envisaged tax cuts.”

Veronika Grimm, a member of Scholz’s panel of independent economic advisers, agrees, highlighing that “there is currently no scope for significantly more debt.”

“The problem will not be solved with a few small reforms or additional leeway. Drastic proposals are needed – and the willingness to discuss them seriously,” she said. “If they fail to turn things around, the centrist Democratic parties may have lost the trust of voters in 2029.”

Meanwhile, for all the fiscal arguments that the election has thrown up, Bundesbank President Joachim Nagel has a different priority: growth friendly reforms. He said so last week in the wake of Germany’s dire GDP data and an outlook for barely any expansion in 2025.

For Randstad CEO Sander van’t Noordende — a Davos regular — Germany needs to change, but he hasn’t given up hope that the country’s problems can be addressed.

“They can all be fixed,” he said. “Germany has very smart people, highly-skilled people, they can make plans. Once they make a plan they can get on the case.”

--With assistance from Bastian Benrath-Wright, Mark Schroers, Jan-Henrik Förster and Iain Rogers.

(Updates with fresh Merz quotes in 11th paragraph)

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