Facing economic challenges, Germany heads for February snap election
Germany to hold snap elections on February 23
Minority government faces economic and diplomatic challenges
No time to pass budget before vote, says new finance minister
Merz, leading in polls, sceptical on debt brake reform
Scholz gets support from his Social Democrat party
Adds statements from party leaders
By Andreas Rinke and Thomas Escritt
BERLIN, Nov 12 (Reuters) -Germany is set to hold snap elections on Feb. 23 after the collapse of Chancellor Olaf Scholz's governing coalition, but officials on Tuesday warned it would leave the 2025 budget and several other policy initiatives in limbo.
The election date is a compromise between the conservative opposition, who wanted a vote in January for fear of leaving Germany rudderless, and Scholz, who wanted a mid-March election to give authorities and parties more time to prepare.
Inflation, Russia's invasion of Ukraine, intensifying competition from China and U.S. President-elect Donald Trump's return have combined to create a perfect storm for Germany whose economy, Europe's largest, prospered from abundant energy, and a benign, pro-trade international political environment.
Reflecting that, the ZEW institute's investor morale index tumbled on Tuesday to 7.4 points, from 13.1 points in October, a much sharper drop than analysts had expected.
A government with a clear majority would be better able to broach topics like Germany's debt brake, blamed by many economists for the country's low investment rate, or to make money available for strategic industries.
The Feb. 23 date is predicated on Scholz holding a confidence vote on Dec. 16 that he would be expected to lose.
A leader in Scholz's Social Democrats said the party stood by the chancellor and brushed away suggestions that Scholz should step side for another candidate, such as the currently more popular Defence Minister Boris Pistorius.
"Now it's about experience and competence and I am sure that Olaf Scholz is the right candidate," SPD parliamentary group leader Rolf Muetzenich told reporters.
Scholz conveys "trust, competence, experience, but at the same time also the necessary emotions," he said.
CLOSING WINDOW
Scholz, who now runs a minority government with the backing of the Greens, hopes to secure enough opposition support to pass laws to protect the Constitutional Court from the far-right and to boost funding for Ukraine before leaving office.
His government collapsed last week after months of wrangling between the two remaining parties and their erstwhile coalition partner, the neoliberal Free Democrats, who demanded spending cuts on a scale their left-wing partners were unwilling to countenance.
Friedrich Merz, leader of the opposition Christian Democrats and favourite under current polls to become chancellor, has so far ruled out scrapping the debt brake.
On Tuesday, he promised a major tax reform but was non-committal on helping the government pass all but the most pressing legislation between now and the election.
That means raising child benefit or raising tax thresholds to tackle fiscal drag might have to wait until a new government is in power.
Joerg Kukies, who was appointed finance minister after Scholz sacked his one-time coalition ally Christian Lindner over budget disputes, said passing a 2025 budget was not realistic.
"It's not the end of the world," he said.
He said a strategy on power plants would have to wait but that the government would stick to plans on the re-privatisation of the energy company Uniper, which was rescued during the energy crisis after Russia's 2022 invasion of Ukraine.
He also echoed the government's criticism of Milan-headquartered Unicredit's mooted takeover of German lender Commerzbank, saying the European banking system did not need such aggressive takeovers.
Germany's coalition government crumbles https://reut.rs/4eqiWB4
Reporting by Andreas Rinke, Thomas Escritt, Maria Martinez, Rachel More
Writing by Thomas Escritt and Matthias Williams
Editing by Friederike Heine and Christina Fincher
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