Germany: The Bundesbank On The Brink Of The Abyss With A Record Historical Deficit

The Germans went to the polls on February 23, reshaping the political landscape of the country. With the victory of the Christian Democrats (CDU/CSU) and the notable rise of the far right, attention turns to the major economic challenges facing the future government. Among them, a shocking revelation: the Bundesbank recorded a record loss of 19.2 billion euros in 2024, a financial abyss that will weigh heavily on Friedrich Merz’s budgetary choices.

A German Economy Under Pressure

Germany, once the economic engine of a Europe in crisis, today shows serious signs of weakness. After two years of recession, companies are warning of a loss of competitiveness and a decline in exports. The ECB’s interest rate hikes, initially aimed at controlling inflation, have exacerbated the difficulties faced by central banks.

Result: the Bundesbank must pay higher interest to commercial banks, while its revenues from bonds are falling.

• The loss of 19.2 billion euros in 2024 is the largest since 1979;
• In 2019, the Bundesbank had still paid 5.85 billion euros to the state;
• Other losses are expected in the coming years, according to its president Joachim Nagel.

Businesses, for their part, are far from calm. They are demanding a drastic reduction in energy costs and bureaucracy. But will the Merz government be able to satisfy them while respecting budgetary constraints?

Friedrich Merz Faces Budgetary Puzzle

The future chancellor Friedrich Merz is not a novice in finance, but he has never held a ministerial position. The CDU’s strongman is a former executive at BlackRock, which fuels criticism of his ties with the banking sector.

“Friedrich Merz is directly from BlackRock, with no government experience. He has been chosen to lead one of Europe’s most influential nations.“, denounces an observer on social media.

The challenge is immense: while the CDU advocates for tax cuts and a return to nuclear energy, its potential coalition allies, particularly the Greens, are advocating for heavier taxation and a radical ecological shift.

As for the SPD, it wants a fund of 100 billion euros to finance industrial transition. But how to finance these projects without the revenues from the Bundesbank and under the constraint of the debt brake?

The other great uncertainty factor comes from across the Atlantic. With the return of Donald Trump to the White House, Germany fears new taxes on its exports to Europe. Trump wants to reduce the U.S. trade deficit and encourages German companies to relocate their production to the United States.

Is a new economic storm brewing for Berlin?

A Systemic Crisis in the Making

Is Germany doomed to economic weakening? Besides the banking crisis and the American protectionist threat, German companies are struggling to find skilled workers. High energy costs, over-regulation, and the burden of social security weigh on industrial competitiveness.

“The economy is contracting. Unemployment is rising. Germany no longer attracts investors.“, warns Rainer Dulger, president of the German Employers’ Confederation.

In light of this situation, a coalition of 100 economic associations launched a political SOS, organizing a demonstration in Berlin on January 29. They are calling for a comprehensive reform to revitalize the economic fabric. Among their demands:

• A massive reduction in bureaucracy;
• A reduction in corporate taxation;
• Incentives for investment;
• A relief of labor costs.

But the future government’s room for maneuver remains limited. Between the budget discipline imposed by the ECB and the pressure from European partners, Berlin may have to make painful choices. Should the debt brake be loosened to boost investment, even if it displeases conservatives?

One thing is certain: the “locomotive of Europe” needs a real boost. But who will dare to hit the accelerator?

It should be noted that this is not the first time Germany has seen dark clouds accumulate on its economic horizon. Just last August, some were mentioning the specter of a recession, alerted by the decline in exports. Today, the question is no longer whether Germany will wobble, but how far it will fall before bouncing back.