Germany’s Elections and the Future of EU-China Tech Competition

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Introduction

On February 23rd, 2025, Germany held its federal elections. The country is currently grappling with economic stagnation, security concerns, and shifting transatlantic relations, all while redefining its role within the European Union. The results were decisive – the Christian Democratic Union of Germany (CDU), led by Friedrich Merz, secured victory, running on the promise of restoring German competitiveness under the slogan “Wieder nach vorne” (Forward Again). Although coalition talks have not yet started and are expected to be challenging, a return of the ‘Groko’ (short for Große Koalition,or Grand Coalition – a governing alliance between the CDU, CSU, and SPD) seems the most viable outcome as of now.

As Europe’s largest economy, Germany has played a leading role in shaping the EU’s economic and trade policy,  especially in high-tech industries where China’s growing influence challenges that of Germany, such as: electric vehicles (EVs), semiconductors, and artificial intelligence. Under Scholz, Germany walked a fine line, publicly supporting the EU’s de-risking strategy while maintaining strong economic ties with China. If Merz is able to form a coalition, the primary obstacle will be to take Germany out of its economic slumber. This raises the question of whether Merz will adopt a more assertive industrial strategy, or continue to balance  economic pragmatism with geopolitical caution.

This article examines how a Merz-led government could reshape Germany’s economic course and influence EU-China tech competition. First, it explores Scholz’s economic legacy, his approach to China, and Germany's challenges during his tenure. Next, it delves into Merz’s economic vision, his stance on China, and his trade and industrial policies. Finally, it assesses Germany’s evolving role in the EU’s strategy toward China, and the wider implications for Europe’s technological and economic autonomy.

Germany’s Economic Challenges Under Scholz

When Olaf Scholz took office in December 2021, Germany was in the midst of the COVID pandemic and the threat of a Russian invasion into Ukraine was looming overhead. Economic recovery was expected to resume over the coming years (German Council of Economic Experts), with current projections by the European Economic Forecast predicting positive GDP growth (+0,7%) in Germany by 2025, after two years of mild recession (-0,3% in 2023 and -0,1% in 2024). More specifically, Germany experienced declining industrial output, concerns over deindustrialisation, and an automotive sector under siege.

The automotive industry, Germany’s economic cornerstone, was particularly vulnerable to China’s growing economic influence. Chinese EV manufacturers, backed by state subsidies and industrial policies such as “中国制造2025” (Made in China 2025), supported policies that would help China to move away from being the ‘world’s factory’ to a ‘technological powerhouse’. Chinese EVs rapidly gained market share, hitting German automakers the hardest within the EU by undermining their competitive edge. Meanwhile, China’s dominance in the semiconductor and AI industries compounded the issue, limiting Germany’s ability to manoeuvre within a tech landscape shaped by U.S. export restrictions and Chinese industrial overcapacity.

Scholz’s China strategy was characterised by caution. While publicly aligning with the EU’s de-risking narrative, his government avoided major confrontations with China, wary of economic retaliation. While Germany is experiencing hefty competition with Chinese companies, it cannot afford to completely decouple from China due to Germany’s economic dependence on it. A decouple could destabilise key industries, such as automotive, mechanical engineering, and electronics, whose supply chains are deeply embedded in China, risking financial strain for German banks who have invested heavily in these sectors. Nowhere was this clearer than in Berlin’s hesitation to support EU tariffs on Chinese EVs, fearing countermeasures that could threaten German automakers’ access to the Chinese market. Instead, Scholz opted for incremental oversight over Chinese investments, ensuring that economic ties remained intact despite rising tensions.

However, this approach was not without criticism. Some argued that Germany’s strategic industries were becoming overly reliant on China, raising concerns about long-term economic resilience. Others pointed to a widening gap between official rhetoric and actual policy implementation, as Scholz’s government failed to meaningfully reduce or set the right path for German industries’ exposure to Chinese supply chains.

Merz’s Economic Vision and Shift in China Policy

Merz’s campaign has centred on revamping Germany’s industrial base by cutting bureaucratic inefficiencies and rolling back EU environmental regulations, which he believes have placed unnecessary burdens on the economy. This signals a decisive break from Scholz’s more balanced economic agenda, which sought to accommodate climate and social priorities alongside industrial growth.

Merz has also been openly critical of German firms’ reliance on China, aligning with the CDU's broader vision for China policy. The CDU's 2023 position paper framed China as a partner in global challenges, but also a systemic rival that seeks to reshape the international order. Furthermore, it stated that previous administrations were complacent in allowing German industries to become deeply entangled with Beijing, particularly in automotive and high-tech sectors. Under Merz, the CDU views China’s economic and technological rise as a direct challenge to Europe’s competitiveness, underscoring the imperative to reduce supply chain dependencies. He also warned that German companies should not expect government intervention if their China investments backfire. His rhetoric has been clear: “Kein Rechtsstaat nach unseren Maßstäben” (Not a state governed by the rule of law by our standards). 

Merz’s concerns about possible backfire are reflected in the 2024 Business Confidence Survey conducted by the German Chamber of Commerce in China, which highlights growing unease among German companies operating in China. The report reveals that over 50% of German businesses cite regulatory uncertainty, legal risks, and geopolitical instability as significant challenges. Additionally, increased state intervention in the Chinese market and policies that give an advantage to domestically produced products – such as those in line with the Made in China 2025 initiative – have raised alarms over long-term profitability and operational stability. 

China’s Foreign Ministry responded swiftly to the election results. During a press briefing, Lin Jian, a ministry spokesperson, stated: “For 53 years, China has viewed its relationship with Germany from a strategic and long-term perspective, adhering to the principles of mutual respect, equality, mutual benefit, and seeking common ground while respecting differences. China is willing to work with the new German federal government to consolidate and develop the comprehensive strategic partnership between China and Germany.” This statement conveys China’s standard diplomatic position, reaffirming its intent to continue cooperation with Germany while avoiding any direct commentary on potential policy shifts under a new Merz-led coalition.

While Merz’s vision for reducing dependency on China is clear, past German governments have struggled to translate rhetoric into concrete action. Under Scholz, Germany officially supported EU de-risking, but ultimately remained highly reliant on Chinese markets, with key industries continuing to expand their ties to China. The gap between policy declarations and implementation raises the question of whether Merz’s government will face similar challenges in implementing his plans. Additionally, as Merz enters coalition negotiations, the CDU’s position on China may not be fully reflected in government policy. The Social Democratic Party of Germany (SPD), still led by Scholz, has, among other disagreements with the CDU, historically advocated for economic pragmatism over confrontation, and will likely push for a more moderate approach toward China, potentially softening Merz’s proposed policies.

Although a new coalition will be formed,the challenge remains the same as under Scholz: Germany’s vast economic exposure to China. Moving too aggressively could trigger a ‘China Shock’ scenario, where abrupt decoupling sparks economic instability. However, if managed strategically, Germany could accelerate trade diversification, focusing on partners such as  Mercosur (Argentina, Brazil, Paraguay, Uruguay), Mexico, and Southeast Asia. Such a pivot, however, could put Berlin at odds with Paris, who have been fighting off a European deal with the Mercosur countries for decades over fears that it would open up trade with the Latin American agricultural market and undermine French farmers.

At the EU level, Merz is expected to push for a stronger industrial policy, advocating for greater European autonomy in its challenged industries. However, Germany’s approach to China will also be shaped by transatlantic tensions, in particular the evolving stance of the United States. A more protectionist U.S. administration could pressure the EU into aligning with their stricter trade measures on China, forcing Germany to strike a balance between its economic interests and political alliances. At the same time, if the U.S. escalates a trade war with China, it could push China to seek alternative markets, potentially allowing the EU to capitalise on Chinese exports that struggle to reach the American market. While Merz may seek to avoid complete alignment with U.S. policies, his government is likely to use China as a bargaining tool in negotiations with the Trump administration, leveraging Germany’s economic weight to secure better trade conditions within the transatlantic relationship. This could manifest in support for the European Chips Act, increased AI research funding, and stricter trade measures targeting China’s industrial policies. Under Merz’s leadership, further EU sanctions on Chinese EV subsidies and currency undervaluation may also be explored. 

Implications for EU-China Tech Competition

Merz’s vision and rhetoric suggest a potential shift in Germany’s role in the EU-China tech competition. Under Scholz, Germany often resisted a unified European stance on China, opposing EU-led initiatives like tariffs on Chinese EVs and restrictions on Huawei. Merz, however, may advocate for a more coordinated European approach on economic security and technological sovereignty. The key question is whether he can move beyond rhetoric to deliver concrete action.

A tougher stance on Chinese industrial subsidies is likely. While Scholz hesitated on initiating or supporting the EU’s more punitive measures, Merz has signalled a stronger willingness to challenge Beijing’s state-backed overproduction – particularly in the EV sector. If Germany supports EU trade defences, it could mark a shift toward a more protectionist industrial strategy. However, China’s potential retaliation remains a serious risk, as German automakers and high-tech firms still rely heavily on access to Chinese markets. Merz’s support for EU competition tools, such as the foreign subsidies regulation, could further reshape the approach to Chinese market practices.

At the same time, Merz’s emphasis on European de-risking and self-sufficiency could deepen EU cooperation on tech development. As the EU struggles to compete with China and the U.S., Germany’s leadership could provide much-needed momentum. However, if Germany prioritises domestic industrial revival over broader EU strategies, or any EU Member State in that regard, it may weaken collective efforts to counterbalance China’s economic influence. A more assertive German policy on China could also create tensions within the EU, particularly among smaller Member States that benefit from Chinese investment. 

In parallel with  these strategic shifts, it is crucial to consider how China might react to a more assertive stance from Germany or the EU. China could respond by imposing targeted tariffs or trade restrictions on key sectors such as automotive and high-tech products, leveraging its significant market presence. Furthermore, China may adopt a similar approach to the EU by accelerating domestic innovation and developing alternative supply chains to reduce its own reliance on European markets. Diplomatic efforts could also intensify, with China seeking to influence individual EU Member States to counter a unified approach. Such responses would be designed to recalibrate the economic balance while avoiding a full-scale trade war, reflecting the complicated interdependence between the EU and China.

Ultimately, Germany’s choices under Merz will undoubtedly shape Europe’s role in the global tech race. Whether through stronger industrial policies, assertive trade measures, or increased investment in technological autonomy, the direction that Germany takes will set the tone for defining the EU’s ability to compete with China.

Conclusion

Germany now faces a turning point. Merz’s election marks more than just a change in leadership – it signals a potential shift away from the cautious, balance-seeking policies of the past, toward a bolder industrial strategy. His vision of reducing dependency on China and pushing for a more united European approach offers hope for renewed competitiveness. However, this change also comes with challenges. What the U.S. does on the trade front remains a critical wildcard – a shift toward protectionism from the Trump administration could significantly influence Germany’s approach to confronting China. Tougher measures against Chinese industrial practices could trigger strong responses from China, putting key sectors like the automotive and high-tech industries at risk, while also testing the unity of the EU, where not every Member State shares the same level of concern over Chinese economic ties.

As coalition talks continue and Germany works to balance its national interests with those of its European partners, the coming months will be critical. The choices made now will not only shape Germany’s future economic path, but will also influence Europe’s overall ability to compete in the global tech arena.

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ABOUT THE AUTHOR

Milo holds a Master’s degree in Asian Studies from Leiden University, where he focused on the politics, society, and economy of Asia. His thesis explored regulatory dynamics and innovation in China’s fintech sector. Before that, he earned a Bachelor’s in Chinese Studies, writing his thesis on Chinese foreign direct investment in the EU. During his studies, He also spent time in Taiwan for a language exchange, deepening his understanding of the region. 

This article was edited by Alessandra Tamponi and Daria Bogolyubova.