Germany appears to be in a state of disarray. Wages have stagnated amid inflation driven by rising energy prices (in 2023, inflation neared 9% before dipping just below 2%), and the GDP contracted by 0.3%. The coalition government, led by Chancellor Olaf Scholz and made up of the Social Democrats, Greens, and Free Democrats, seems disjointed. In foreign affairs, Germany has aligned with the U.S. and other nations in tightening sanctions on Russia, but this has backfired, pushing oil and gas prices up and strangling its own economy.

Historically, when domestic discontent rises in Germany, global frameworks can be shaken. There's a growing sense that Germany might trigger an EU collapse by withholding its financial contributions--a potential "Gerexit."

A Refugee Surge Amid Economic Strain

Like Japan, Germany's economy is centered on manufacturing, not finance or IT. In recent years, its decision to phase out nuclear power and the sharp drop in natural gas imports from Russia have destabilized energy prices, weakening its industrial competitiveness. Meanwhile, Germany's pivot toward electric vehicles has faltered, and the country is losing market share in China to local competitors.

Amid these challenges, the number of asylum seekers surged by about 50% in 2023, with 3.5 million refugees or former refugees now living in Germany. This, combined with nearly an equal number of foreign migrant workers, has led some Germans to blame their own economic struggles on immigrants and refugees.

The Rise of New Political Parties and the Path to 'Gerexit'

As frustration grows, Germany's traditional political parties are losing ground. The far-right Alternative for Germany (AfD) is gaining momentum, particularly in the former East Germany, where economic disparities persist even decades after reunification. The left-wing BSW (Sahra Wagenknecht Union) has also emerged, capturing the discontent of former East Germans who feel marginalized by the west. In September's local elections, these parties significantly eroded support for the ruling coalition.

Germany faces a general election next year. If the AfD and BSW win a substantial number of seats, they could wield enough power to block budget proposals--even if they don't enter government. The AfD has long criticized the EU, arguing that it undermines German sovereignty. They could tap into public frustration by questioning why Germany should fund EU programs like agricultural subsidies or provide military support for Ukraine. Slashing Germany's contribution to the EU budget could be their next move.

Germany contributes roughly €30 billion annually to the EU, the largest share of the €150 billion EU budget. If Germany pulls back, it could spark similar moves from other countries like France and Italy, severely limiting the European Commission's ability to function.

Europe's Unity Could Survive Without the EU

Despite these potential disruptions, a European collapse isn't imminent. Key institutions like the European Central Bank and agreements such as the customs union--which ensures tariff-free trade within Europe's domain--would remain intact. Many treaties ensure the free movement of goods and people, and common infrastructure standards would still govern areas like roads and industrial products.

While the EU, with its supranational European Commission, was established by the Maastricht Treaty in 1992, Europe thrived before that under the European Economic Community. In fact, Eastern European countries broke away from the Soviet sphere in the 1980s largely due to the allure of Europe. A "Gerexit" might weaken the EU, but it wouldn't dismantle Europe's broader architecture.