Germany, in search of recovery - Merz's economic plan to stop the recession and the effect of tariffs
US President Donald Trump's moves to impose steep tariffs on more than 161 billion euros of annual German exports to America could hardly have come at a worse time for Europe's largest economy. The move comes as Berlin faces a third straight year of recession.
It is not surprising that the new coalition agreement for the next administration of Chancellor-designate Friedrich Merz focused heavily on a full economic recovery.
Merz has already sent a clear message to the continent that Berlin is ready to abandon its fiscal conservatism, ease the notorious debt curbs and inject hundreds of billions of euros into infrastructure and defense.
The coalition agreement between Merz’s center-right Christian Democrats and the center-left Social Democrats reads like an economic war plan: tax cuts, energy price cuts and a swift onslaught of public-private investment funds. At its core is the promise, or the risk, that Germany can regain its competitive edge as difficult global tensions intensify.
"First and foremost, we will strengthen the price competitiveness of the German economy," Merz declared in Berlin.
After a dismal year that saw Germany's economic output shrink by 0.2 percent, even modest growth forecasts for 2025 look fragile, especially given Trump's global barrage of tariffs.
Merz is framing the coalition agreement as a pro-growth manifesto. A "German Fund" will be created with 10 billion euros of public money, while an ambitious proposal for private investors aims to increase this to 100 billion euros to support new businesses and expand enterprises. The government is also promising a corporate tax cut to encourage investment.
"The next coalition will reform and invest to make Germany economically stronger. And Europe can also rely on Germany," Merz said.
The parties promise to reduce electricity taxes, network tariffs, remove a tax on gas prices and introduce an industrial electricity tariff, all in the name of reviving industrial production. Voluntary overtime will be exempt from taxes.
The coalition agreement also declares the steel industry as "of key strategic importance" and supports carbon capture and storage technology, while promising tax breaks for electric vehicles.
While headlines herald reform, many of the key measures come with delays or caveats. A gradual cut in corporate taxes, for example, from 15 percent to 10 percent, will not begin until 2028.
The pact between the parties carries the existential caveat that “all measures in the coalition agreement are subject to funding.” And here lies the problem: That funding is far from guaranteed.
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