Following the German parliamentary elections in February 2025, onlookers may have observed a strange dualism in the statements made by the leaders of the new incoming coalition government, made up of the centre-right Christian Democrats (CDU) and the centre-left Social Democrats (SPD).

On the one hand, they agreed to soften Germany’s restrictive public debt rules to allow for bigger investments in defence and infrastructure – something the new chancellor, Friedrich Merz, of the Christian Democrats, objected to during the election campaign. On the other hand, both Merz and leaders of the Social Democrats have been repeating narratives about savings, a leaner state, and the need for careful fiscal responsibility in spending decisions. The coalition treaty is full of phrases suggesting that plans will require close financial examination and that the parties want to undertake those actions rather than will undertake them.

The duality between large funding increases and language emphasising prudence in state finance was particularly noticeable in the initial lack of emphasis on climate crisis measures. Before the intervention of the Green Party, whose votes were needed to pass the constitutional amendment easing the “debt brake” in March, there were no fixed commitments to spending on a key policy issue: supporting German industry while advancing the renewable energy transformation at pace. Eventually, 100 billion euros were earmarked for climate protection and green restructuring of the economy. This, however, was stretched over 12 years.

More or less state?

At first sight, none of this may appear surprising. Merz had been emphasising a market-led approach to tackling the climate crisis with a focus on the innovative capacity of businesses. It matched his longstanding broader account of how the economy should be run, with the state taking a big step back and allowing space for the free market to drive technological change. Merz suggested that people wanted “less” of the state, to be freed of the restrictions it imposed, and in particular, to reduce the amount of debt it accumulated.

While this explains the continued prudent language about state spending, how can we square the circle to also account for the massive increase in debt-financed spending that goes beyond defence activities? While some of the calls to reduce state bureaucracy and increase opportunities for private investments are founded in genuine concerns about restrictions on economic competitiveness (including for private renewable energy investments), the apparent dialectic is in line with decades of mainstream economic policymaking. While the neoliberal organisation of the economy involved approaches such as privatisation and welfare state reductions at great scale, at no point was it about a weakening of the state. To the contrary, neoliberalism has always focused on the use of strong states to reshape the delivery of state functions, economic activity and social life according to market principles. It does not assume that market order maintains itself; instead, it requires a strong state to support it. This approach is longstanding practice in Germany with its ordoliberal tradition, in which state action has been used extensively by CDU- and SPD-led governments to steer market processes to achieve particular outcomes of private sector activity. 

Indeed, the coalition treaty of the new German government includes many policy choices aimed at supporting particular markets through strong state action, for example by reducing VAT for food and drinks in hospitality businesses. This is not a new approach. Even during periods of apparent fiscal prudence and strict state debt rules, the German state provided huge sums to subsidise activities supporting the car industry indirectly, for example through subsidies for business vehicles and for commuters. The new government continues on this path by increasing the subsidy for commuters (mostly benefiting those driving to work). 

Therefore, the duality in the approach taken by the new government is not as idiosyncratic as it may initially appear. Economic policymaking in Germany over recent decades has not been about a weakening of the state but rather the types of strong state action that are able to support particular areas of market activity. While the assumption of greater amounts of new state debt is important, the biggest change is the greater emphasis now placed on state-supported investment – in addition to many of the existing subsidy schemes.

Directing the climate transition

Focusing on the necessary transition to a carbon-neutral economy, the new government’s approach is therefore a mixed bag. While additional investment for the transition (albeit limited in scale over a 12-year horizon) is welcome, many of the strong interventions in markets (such as increased subsidies for car-based work travel) are examples of costly policies that are directly counteracting carbon reduction goals. The scale of funding (“more” or “less” state) is an elementary question; equally important is how the state directs its involvement in the economy. The German government has been shaping the economy continuously. The key question is where it places the emphasis of its strong actions in relation to the transition away from fossil fuels.

For a successful transition towards renewable energy generation and use, collaboration between the state and the private sector is required. Instead of asking whether one should take the lead over the other, the question of how this is done should centre on what the interplay between state and firms should look like. Although the German energy market has attracted more players in recent times, energy generation still dominated by a few major firms. Efforts by smaller municipalities, groups of households, or even individual households to organise their own energy generation using renewable energy sources have traditionally been very difficult. While the previous government, and especially the business and climate ministry under Robert Habeck (Greens), reduced the burden for such efforts and enhanced the ability of communities to benefit from local energy production, many barriers remain. This is important because many people in Germany feel that the climate transition is happening in a way that does not take their lives into account. That lack of perceived efficacy has been harnessed by the far-right Alternative für Deutschland (AfD) to mobilise against transformative efforts in a worrying way.

For a successful transition towards renewable energy generation and use, collaboration between the state and the private sector is required.

If German politicians engaged more with public perceptions of how the economy works, their climate transition efforts could be much bolder. Politicians often assume publics to be focused on singular preferences, like state debt reduction, but people’s economic views are actually more complex and indeed align with discussions about how the state and private sector should interact.

d|part, a think tank for political participation I co-funded, conducted 16 focus groups in Bochum and Leipzig in 2023 and 2024, exploring how Germans of all backgrounds really discuss economic issues. This helped reveal how politicians can confidently engage in strong action rather than constantly downplaying the existing and changing involvement of the state in the economy and climate transition. 

The view from the ground

During our research, most people expressed some views reflecting orthodox market-based principles. Neoliberal framings were particularly present when participants talked about the welfare state. While some saw the social safety net as one of the key strengths of the German state, many emphasised the need for everyone to make a substantial contribution through work (“Leistungsprinzip”). Those in lower-paid jobs especially often talked negatively about recipients of benefits, because they did not see them as “pulling their weight”. Common tropes grounded in factual errors (for example, that welfare recipients got more money than minimum income workers), were repeated several times:

“One should at least earn more than what you get as ‘Bürgergeld’ [minimum income support]. There’s a whole series of people that say, if I get that and that much ‘Bürgergeld’ why should I go work for the same amount of money?”

Nils,¹ 26 (Bochum)

Apart from views about welfare, many participants also saw the private sector as solely responsible for innovation. The idea that most innovation emerges from interconnected state and private sector networks – what Marianna Mazzucato described as an “entrepreneurial state” – was not common knowledge. Many described the role of the state in this regard as one of providing foundations, such as education, but assumed that new developments were attributable to the private sector only:

“When it comes to the economy, German medium-sized businesses [‘Mittelstand’] are the innovation engine. Germany’s biggest capital has always been and will be education…. And we go towards those medium-sized businesses because it is them who take the greatest responsibility for society.”

Sascha, 31 (Leipzig)

At the same time, however, most people did not just want the state to be a passive bystander. While welfare transfers were discussed contentiously and the state’s role in supporting technological innovation was underestimated, hardly any participant wanted to leave things to the market. Many wanted policies to be directed to support German industry, but they did not believe that economic growth per se would benefit everyone:

“We all see how it works, we don’t always need to have growth, because growth always comes at the expense of someone else.”

Julian, 43 (Bochum)

There was little belief in the idea of trickle-down economics. For most, it was clear that big societal challenges require coordination and joint efforts. Relying on the individual motivations of companies was not enough for most, as they were often described as “stand[ing] in competitive struggle with each other. They look at profit and sometimes are very short-term focused” (Melanie, 64, Leipzig).

This was particularly apparent in discussions about the challenges posed by the climate crisis. Most agreed that it was a serious issue that required engagement with. They wanted the government to act in a way that takes into account the impact on businesses and households, but which ensures that the transition is achieved. For most, the problem was not a rejection of strong climate action, but a lack of confidence that the state is capable of assuming its leadership role:

“… We’re so far behind, also with the dependence on resources like oil, gas, etc. We should have done so much already with wind and had the opportunity to do construction with solar. And the government of the CDU together with the SPD simply messed that up, they rather relied on cheap Russian gas…All of these are things we missed out on. We would be in so much better a position if our politics over the past 20 to 30 years had been conducted in a forward-thinking way.”

Peter, 58 (Leipzig)

People’s views about the economy and the state’s role in it were not as unidimensional as many politicians might have assumed. Most respondents wanted policies that allow space for private firms to operate freely and also wanted the state to provide direction and longer-term orientation. This was equally apparent in discussions about state finance. Most liked the idea of reducing state debt in general, but were simultaneously very open to new borrowing if used for future-oriented investments. Survey evidence supports this finding: two-thirds of Germans would opt for the state to stop taking on new debt in principle, but two-thirds also agree that new debt is acceptable if it is used for investments.

Besides avoiding a binary “more or less state” mindset, there is another important difference between how people are often portrayed regarding their economic views, and their actual attitudes. Contrary to the individualising tendencies of neoliberalism, most participants indicated that their material wellbeing was a reflection not only of the “money in their own pocket” but also their immediate lived environment.

Most political action in Germany aimed at improving people’s living standards is discussed in terms of its implications for household income. Even in terms of energy transitions, compensation mechanisms tend to centre on cash transfers to compensate for carbon price increases. Such considerations are very important. Many research participants were indeed concerned about the impact of climate transition measures on their personal finances, in particular in the aftermath of a cost-of-living crisis. But political measures only directed at individuals and households underestimate the extent to which people think about material wellbeing and the economy collectively within the communities in which they live. Importantly, when prompted to think about material wellbeing and the economy, people fused considerations of issues like the availability of jobs in their region with community attributes determined by state service provisions:

“Why can’t our school students use public transport for free if they show their student ID? Why doesn’t the state, for example, organise sports initiatives and clubs? That could be music, could be maths. Some students, they come home after school and have no hobbies. They sit at home on their phones because the parents work. The parents have no money to pay for this and that, to send their child [to such activities].”

Valentyna, 54 (Leipzig)

In other words, people evaluate the functioning of the economy and their material wellbeing both through their personal finances and the conditions in their community. As this involves public services as well as private sector offers, there is an opportunity to improve people’s material wellbeing not only through personal account transfers, but also via collective provisions – which can be more cost-effective for certain services due to pooling effects.

This has an important secondary benefit: it can help overcome disaffection with the state’s capacity to manage big transformations, thus reducing the scope for populists to harness discontent. Germans’ perceptions of changes in their immediate environment have largely been negative, matching an overall sense of pessimism regarding the development of the country’s economy.

Political measures only directed at individuals and households underestimate the extent to which people think about material wellbeing and the economy collectively.

Synergy in economic and climate policy

People need to see that state action on the economy and climate transition can result in changes that positively affect their lives. In addition to increasing households’ disposable income, improving offers in the community is the best way to create direct visibility for such efforts.

Whatever action is taken by politicians must be shown to have an impact on people’s lived realities. At the moment, many in Germany perceive the climate transition as something that is done to them rather than something they are a part of. As it progresses, people must feel they have a strong sense of ownership and agency. Questions must be asked around how, for instance, communities can actively share in the generation of renewable energies. Rather than only benefiting indirectly through secondary compensation mechanisms, enhancing communal ownership of related infrastructure and creating models for the direct sharing of profits is likely a key way to involve people.

This is not just an idea propagated by several advocacy organisations championing democratic innovations. In a recent interview with DER SPIEGEL, Sachsen’s Christian Democrat head of government, Michael Kretschmer, also promoted such efforts. Discussing people’s engagement with wind energy generation, he said:

“They have no emotional connection to a wind turbine, unlike with a mine or a coal-fired power plant, which also offer them a job. However, if they have a financial stake in a wind farm via a cooperative and are allowed to have a say, things look very different.”

This insight should be taken to heart by the new federal government. People’s view of the economy and climate transition is more complex than often suggested. While most have internalised some elements of neoliberal orthodoxy, they do not want the state to retreat to some abstract notion of freedom.

Instead, most wish for a proactive state that competently supports businesses and people in the longer-term transitions for which politicians must take responsibility and provide leadership. Engaging with people’s concerns does not simply mean changing how much money is in their pocket (although disposable income is one important dimension). Material wellbeing is also determined by people’s perception of their community, involving both private sector and state offers. Enabling more opportunities for people to directly share in, and see the results of, the transformation at a local level is not just likely to increase support for it, but also enhance people’s sense of efficacy and belief that political decisions matter.

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1. Names altered to retain anonymity. ↩︎