German Chancellor Friedrich Merz is facing one of his most delicate moments since he came to power. This Friday, the Parliament must vote on a pension reform which has become the main focus of tension within his own coalition. He youth wing of the CDU/CSU —his party—has threatened to block the bill, questioning an agreement that Merz closed with his government partner, the SPDand opening the door to a major political crisis just six months after the start of his mandate. Berenberg’s chief economist, Holger Schmiedingassures that Merz faces «his toughest test yet». The problem revolves around the pension system and, specifically, How benefits will evolve after 2031. Although the coalition agreement contemplates faster increases until that year, as well as an improvement for mothers with children born before 1992 and tax benefits for those who prolong their working life, The pact left it unclear what will happen beyond that horizon. The conservative youth wing demands that pensions return to the pre-reform level in 2031, instead of continuing from a higher level that is more expensive to finance. They believe that, if this is not done, it will be the younger generations who will end up paying an increasing and unsustainable cost in the future.
A FRAGILE MAJORITY AND A POSSIBLE BLOCKADE
Schmieding explains that, with 328 of the 630 seats in the Bundestag, Merz’s coalition barely has a majority of 12 votes. The young conservatives, who total 18 deputies, have enough capacity to overthrow the reform if they vote as a bloc and if no opposition MP supports it. In an informal test within the CDU/CSU parliamentary faction, between 10 and 20 deputies refused to support the text, a worrying sign for Merz and his allies. The young wing, however, does not seek to overthrow the Government. Its objective, according to Berenberg’s analysis, is to make clear that a future broad pension reform—scheduled for mid-2026— must include benefit cuts that ease the financial burden on younger generations. In the German pay-as-you-go system, the younger generations must bear the costs of pensions.
«The extreme risk of the situation getting out of control is not zero»
Even so, the risk of a parliamentary defeat exists. Postponing the vote would already be a blow to the chancellor’s authority. If the Bundestag rejects the reform, The Government would enter unstable ground. However, Schmieding considers that the most extreme scenarios – the fall of the Government, a minority Merz Executive or new elections – remain unlikely: neither party wants to assume that political cost. Ultimately, he assures, the CDU/CSU and the SPD would seek a negotiated solution, even subjecting the text to another vote after minimal modifications. «Remember that Chancellor Merz himself was elected by Parliament on the second attempt. Once those who had not initially supported him realized the possible consequences of their actions, they rectified. Still, the extreme risk of such a situation getting out of control is not zero«, indicates Schmieding. The political pressure comes at a delicate moment for Merz. The CDU/CSU cannot achieve internal cohesion, the SPD is experiencing doubts about the economic strategy and the far-right party AfD leads the polls with around 26% voting intention. The coalition, a «marriage of convenience» born after the fall of the previous Government of Olaf Scholz, has not yet found stability. For Schmieding, however, something positive could be drawn from the situation. «Hopefully, one consequence could be that the SPD realizes that it needs to accept deeper growth-oriented reformssuch as a pension review that saves costs in the future. Otherwise, the Government’s failure to achieve more sustained growth could harm them even more in future elections,» he concludes.
