The German government is teetering on the edge of collapse - possible outcomes.

• The coalition government of Germany has been facing challenges due to growing disagreements among its three parties regarding economic and fiscal policies.
• Tensions are arising due to disagreements on how to aid the struggling German economy and the 2025 budget.
• According to Carsten Brzeski, global head of macro at ING, the risk of the German government collapsing has never been higher than it currently is.

The coalition government of Germany has been facing challenges due to growing disagreements among its three parties regarding economic and fiscal policies.

Recent weeks have seen the situation worsen, prompting worries about the three-year-old alliance between Chancellor Olaf Scholz's Social Democratic Party (SPD), the Greens and the Free Democratic Party (FDP).

Reports suggest that a coalition break-up could occur this week, as coalition representatives held talks on Sunday night and early this week, prior to a scheduled coalition meeting on Wednesday.

The German government is currently facing a slow-burning political crisis that could lead to the collapse of the governing coalition, according to Carsten Brzeski, global head of macro at ING, who made the statement on Monday.

Berenberg's chief economist, Holger Schmieding, observed that the three coalition partners have been behaving as though they were gearing up for a future election campaign against one another.

Last week, Scholz met with industry leaders, but he did not invite his coalition partners, causing the FDP to hold a separate meeting without the SPD.

Germany's economy minister, Robert Habeck of the Green party, proposed a policy plan to stimulate business investment, which was criticized by the FDP.

The Lindner paper

On Friday, Finance Minister Christian Lindner released a paper aimed at revitalizing the ailing German economy.

J.P. Morgan's euro area economist, Greg Fuzesi, stated in a note on Monday that the paper presents a serious effort to analyze Germany's problems and offer solutions. However, it opposes fundamental SPD and Green positions, which may make it difficult for them to accept.

Brzeski pointed out that the paper's content is not the main concern, even if it contradicts key policies from the SPD and Greens, but emphasized that the tone of the paper highlights the growing tension between coalition partners.

In a Sunday TV interview with ZDF, Lindner stated that the issues would be resolved, emphasizing that this was primarily the responsibility of his coalition partners. When asked about his intentions to leave the coalition if his economic growth suggestions are not supported, he evaded the question.

A hotly contested budget

The budget for Germany in 2025 has been a contentious issue within the coalition, as highlighted in Lindner's paper. Although the budget was initially presented earlier this year, it left several billion euros of funding unclear. According to the current timeline, the budget is expected to be finalized by the middle of November.

Germany's coalition government is currently under pressure to make tough choices due to time constraints, as it grapples with conflicting economic ideologies and the financial hole left by the constitutional court's ruling last year, which declared that the government could not redirect emergency funds raised during the Covid-19 pandemic to its budget.

Schmieding of Berenberg warned that the coalition may collapse if they cannot reach a consensus on fiscal and reform priorities for the 2025 budget.

Possible coalition break up?

Several scenarios could now change the German government's make-up, in addition to finding a solution for the issues.

Scholz could ask the FDP to leave the coalition if they continue to irritate him, according to Berenberg's Schmieding.

If the FDP receives less than 5% of votes in the federal election, a brief period of an SPD-Green minority government under Scholz would likely be followed by snap elections early next year, according to the latest polls.

The CDU is expected to win the largest share of votes in the last federal election, while both the SPD and Greens are likely to experience losses.

Schmieding stated that while snap elections are not the most probable outcome, they are a possibility.

Brzeski of ING stated that a minority government could continue until the election in 2025, even if the FDP left the coalition, and a snap election would not necessarily be triggered.

According to the German constitution, the federal president has the power to call for snap elections if the Chancellor loses a vote of no confidence in parliament.

But the outlook for the coalition appears weak, according to Brzeski.

The risk of the German government collapsing is currently at its highest point, even with potential geopolitical uncertainty from the upcoming US elections, according to him.