(Bloomberg) — Germany’s ruling coalition is still in power, but the tripartite alliance currently exists only in name.

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Behind the scenes in Berlin, talk of a break before elections scheduled for next September has become more pronounced. Some senior officials felt the only thing that could save the so-called traffic light coalition was the fear that would result from Donald Trump’s return to the White House, according to people familiar with the matter, who asked not to do so. TO DO. be identified because the discussions were private.

The extent of these strained relations will be on full display Tuesday, when Scholz and Finance Minister Christian Lindner, of the business-friendly Liberal Democratic Party, hold parallel and partly competing meetings with industry officials to explore ways to revive the country’s stagnant economy. Neither invited the other, and both excluded Green Economy Minister Robert Habeck, who last week surprised his cabinet colleagues with a proposal to create a German fund to support investments.

Scholz, Habeck and Lindner played a key role over the past three years in brokering compromises within the coalition, but they lost mutual trust to some extent and focused on winning voters rather than winning. search for common ground, the sources said.

Strains are no secret. During a visit to India this weekend, a student asked Chancellor Olaf Scholz what it meant to lead the three-way alliance. The Social Democrat laughed and said: “Well, I want to be very honest with you. The coalition government that I lead is not the simplest in the world.”

Tensions between the sides have been rising for months as budget constraints collide with a struggling manufacturing sector, grappling with a slowdown in China and high energy and labor costs. Europe’s largest economy, which releases GDP data on Wednesday, has likely been in recession since April.

Concern over living standards has fueled anti-immigrant sentiment and caused all three parties to lose support in polls compared to the last election in 2021. The FDP’s current support would put it at risk of failing to gain access. in the lower house of Parliament.

With their fortunes dwindling, the ruling parties are using their government programs to improve their campaign profiles. Scholz took his partners on the wrong foot about two weeks ago when he surprisingly announced an “industrial pact” with business leaders led by himself. Habeck and Lindner were unaware of this, although they had pushed Scholz to take further steps to ease the burden on businesses in recent months.

Habeck responded to Scholz’s proposal a few days later by floating the idea of ​​subsidizing up to 10% of business investments. Lindner, a fiscal hawk, dismissed the idea as a potential violation of European Union restrictions on state aid.

The FDP leader then let his parliamentary group schedule a meeting with small and medium-sized businesses and trade associations not invited to the Chancellor’s summit. The meeting comes just hours before Scholz hosts union and industry representatives on Tuesday.

“There is no shortage of proposals,” said Jürgen Goldinger, CEO of German ventilation specialist Maico Holding and member of a trade delegation that visited India last week with Habeck. “It seems difficult to reach consensus between parties and then find a pragmatic way to make decisions. »

This partial dysfunction creates a power vacuum in Germany that threatens to spread across Europe as the region seeks to maintain support for Ukraine’s defense against Russia. But the stakes are high for any party that withdraws from the coalition.

Although Scholz’s government is deeply unpopular, Germans value stability and the political consequences of withdrawing from the coalition could be serious. The FDP is seen as the weakest link, but with support hovering below the 5% threshold for entering the Bundestag, losing the Finance Ministry as a platform for the party’s cautious fiscal policies could prove costly .

Beyond political tactics, other problems lie ahead for the coalition. The 2025 budget is due to be approved by lawmakers in the German parliament in about two weeks, but there is still a deficit of up to 10 billion euros ($11 billion) to fill. Maintaining the country’s net debt limit enshrined in the Constitution is Lindner’s top priority and conflicts with the economic incentives Habeck seeks.

“We are now in the middle of what I call the fall of decisions,” Lindner said last week in Washington after announcing that there was no possibility of more spending and that even further consolidation was necessary.

Yet another stumbling block could come from Germany’s highest court, which sparked a government crisis in November last year by ruling that special off-budget funds were unconstitutional. Judges of the Federal Court are expected to rule this year on a levy for high incomes, known as solidarity tax, which could potentially trigger a new government financing crisis.

When asked if the coalition would continue to celebrate Christmas together, Scholz replied wryly during his trip to India: “Christmas will always be celebrated.”

–With help from Sonja Wind.

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