BERLIN — Less than five months since he became chancellor, Friedrich Merz’s options for ending Germany’s long economic stagnation already look slim.

Merz came to power on a promise to bring a speedy end to Germany’s industrial malaise, but the economic outlook has only turned grimmer since he took office, and his political frailties aren’t helping. Business leaders are publicly venting their frustration.

“The mood in our industry is no longer just tense —  it is furious, and it is disappointed,” Bertram Kawlath, president of VDMA, a lobby group for machinery and equipment manufacturers, said at a recent event in Berlin as Merz looked on. “The fear of reform looms large like the proverbial elephant in the room. This hesitation comes at a high price. More and more companies are facing deep cuts. Jobs are being lost.”

Merz already faces an uncomfortable reality: He has few weighty options for delivering the sweeping reforms and the rapid turnaround that he staked his election victory on.

Manufacturing firms that once powered the country’s postwar economic boom are shedding jobs. The total number of unemployed people reached 3.02 million in August — the highest figure in a decade. Following two straight years of economic contraction, economists expect little if any growth this year. German business morale is on the decline.

A historic move by Merz and his allies to unleash hundreds of billions of euros in borrowing for infrastructure and defense last March is having a beneficial economic effect — but it’s not enough to fully make up for larger structural problems, economists say. That spending will help bring back anemic growth of 1.3 percent in 2026 and 1.4 percent in 2027, a group of German economic institutes predicted this week.

“The German economy is still on shaky ground,” said Geraldine Dany-Knedlik of the German Institute for Economic Research. “It will recover noticeably in the next two years. However, given ongoing structural weaknesses, this momentum will not be sustained.”

None of this can rightly be blamed on Merz’s government. The massive structural problems the chancellor is confronting — U.S. President Donald Trump’s tariff wars, high energy prices, increased competition from China, an aging population — long predated his arrival or seem largely beyond his power to resolve.

But that hasn’t stopped Merz from suffering the political consequences. Dissatisfaction in his government is growing, with a new poll showing only 26 percent of Germans approve of his performance. Merz’s main political opponent, the far-right Alternative for Germany (AfD), the largest opposition party in parliament, is increasingly hitting the chancellor hard on the economy and on his efforts to revive it through borrowing.

“You will go down as the most bankrupt of all chancellors in the history of the Federal Republic of Germany,” AfD co-leader Alice Weidel said in the Bundestag this week before going on to bemoan how “deindustrialization and exodus are affecting all industrial sectors.”

The approach appears to be working. In September, the AfD surpassed Merz’s conservatives and became the country’s most popular party for the first time since its inception more than a decade ago, according to POLITICO’s Poll of Polls.

‘Autumn of reforms’

Merz is keenly aware of the rising alarm among industry leaders and appears to have realized that his political survival depends on speedy action.

After spending the first months of his chancellorship largely focused on foreign policy issues — particularly on rallying military aid for Ukraine in the face of the Trump administration’s faltering support — Merz has turned to domestic matters, conducting a series of high-profile meetings with business leaders and addressing the economy head-on.

“We haven’t seen any real growth for many years,” Merz told members of a chamber of trade during a visit to his home region in western Germany earlier this month. “The first step toward improvement is to recognize that we are not just dealing with a temporary economic downturn, but with a structural growth crisis.”

Merz then vowed to launch fundamental reforms in the fall. Some of his conservatives have dubbed the initiative “the autumn of reforms.”

The problem for Merz is it’s unclear whether his coalition ― consisting of his conservative alliance and the center-left Social Democratic Party (SPD) ― will be able to push through consequential legislation in the coming months. Lawmakers are considering granular moves to trim long-term unemployment benefits and to increase financial incentives for pensioners to work.

But proposals on the most far-reaching and politically sensitive reforms — including a structural overhaul of the pension system and a more sweeping reform of the country’s constitutional spending restraints — have been outsourced to expert commissions. That makes quick, bold reforms unlikely given the complexity of the tasks involved. 

Some SPD politicians are also expressing doubt that much will materialize from the “autumn of reforms,” calling it an empty political stunt. “I don’t really understand the term,” said Dagmar Schmidt, a SPD lawmaker. “We have not even entered negotiations.”

In the meantime, Merz has called for more high-profile meetings, including a two-day coalition summit in a villa on the outskirts of Berlin focused on competitiveness. He is also planning talks with representatives of the troubled car and steel industries. This week, Merz also appointed a commissioner for foreign investment who said one of his first orders of business will be to organize an investor conference. 

Meanwhile, business representatives say time for the truly ambitious reform needed is running out.

“It’s like our economy is in intensive care and we need immediate treatment,” said Jörg Dittrich, president of the German Confederation of Skilled Crafts.

Dittrich called on the government to immediately do away with unnecessary bureaucracy and overhaul Germany’s social security system to control surging costs. “We must not lose our competitiveness because we cannot afford to pay for all this,” Dittrich said. “We must ensure that we can continue to invest.”

‘There is no plan’

One reason Merz’s options are limited is his relative political weakness. With the rise of the political extremes, the chancellor’s ideologically divergent coalition has one of the narrowest parliamentary majorities in Germany’s postwar history.

It was that weakness that forced Merz to undertake what may well end up being his most ambitious reforms even before taking office. In March, Merz used the outgoing parliament to push through a historic package of spending reforms that partially untethered Germany from the self-imposed spending restraints of its constitutional debt brake, creating a €500 billion infrastructure and climate fund and allowing for massive defense spending to face down the threat posed by Russian President Vladimir Putin.

Merz decided to act at that moment because the country’s centrist parties still had the two-thirds majority needed to amend the constitution while the previous parliament was still in power. That’s a majority he no longer has, limiting his ability to undertake similarly sweeping constitutional reforms.

But the bigger problem for Merz is that the spending reforms already passed are likely not enough to drive robust growth, economists say.

For one thing, there are doubts as to whether Germany’s massive defense spending increase will stimulate much economic growth, as some have hoped. In the short term, every euro the German government spends on defense will lead to only 50 cents of additional economic activity, according to a study by economists at the University of Mannheim. In the longer term the effects are hard to predict, according to the authors.

“To go out and say that this is really the recipe for the boom is really overselling it from an economic perspective,” said Tom Krebs, one of the authors of the study. “We can’t have that many tanks to compensate for all the other stuff that’s going wrong in the manufacturing sector.”

While infrastructure spending has a greater multiplier effect, the €500 billion package is also not enough on its own to stimulate strong growth, as it is spread out over 12 years — and much depends on how it is used. “It’s still good, but it’s much less than people think it is,” said Krebs.

Many economists agree that what Merz has done so far is not enough. A majority of economists rated the performance of Merz’s coalition as “rather negative” in a survey conducted by a leading economic institute.  

“I think we need a sensible and strategic industrial policy, and we don’t have it,” Krebs said. “There is no plan.”