After winning Germany’s elections, Friedrich Merz vowed to form a coalition government in two months — a tall order by recent German standards. Donald Trump’s tariffs moves made it happen even faster.
Unveiling the agreement on Wednesday, the leader of the Christian Democrats listed the unpalatable threats to his country’s security and prosperity: Russian President Vladimir Putin was threatening Europe, and the US administration had “triggered new turmoil”, causing “enormous” economic uncertainty.
“We conducted the negotiations in a situation of growing global political tensions — in a situation in which many forces from within and from outside are not working with us” Merz said, standing alongside the leaders of the Social Democrats and the CSU, his Bavarian sister party.
The breakthrough, which means Merz could become chancellor in early May, comes as the Eurozone’s largest economy is struggling to grow. After three years of stagnation, Trump’s 20 per cent tariffs on European goods — even as they have been suspended for 90 days — are looming large, threatening to tip the German economy into recession and erase any gains from Merz’s €1tn spending package over the next decade.
Meanwhile, the far-right Alternative for Germany which has opposed the fiscal stimulus for defence and infrastructure, is gaining support. After a historic second-place win in the February elections, the AfD on Wednesday for the first time supplanted the CDU as Germany’s largest political force in a survey.
“In these stormy times, what is needed at long last is a federal government that is capable of action,” said Robin Winkler, Deutsche Bank chief economist for Germany.
The 146-page coalition agreement, which outlines the government’s main policies on topics including the economy, defence, foreign affairs and energy, was met with little enthusiasm among most economists, who pointed out the lack of ambitious structural reforms as the government partners diluted or neutralised each other’s pledges.
The document includes a vow to slash corporate taxes by 5 points from 2028 — a CDU measure — and to raise the minimum wage to €15 per hour — an SPD campaign pledge. Merz secured the dismantling of welfare benefits introduced by the previous SPD-led coalition, but he did not secure income tax cuts.
“The plan promises more subsidies but identifies only modest savings,” noted Holger Schmieding, chief economist at Berenberg.
The planned reforms “fall short of the ‘grand compromise’ between centre right and centre left which Germany needs to return to vigorous growth for good”, he added. The measures would still boost the long-term annual growth potential of German real GDP, which currently stands at a meagre 0.4 per cent, he said, but probably not double it as he had hoped.
Still, Merz insisted on Wednesday that he would pursue radical change. The next government would shrink the size of the next federal government by 2 per cent a year, he said. He stressed however that “this shouldn’t involve lay-offs”.
“We’re not hiring Elon Musk here,” Merz said in reference to the US billionaire’s role within the Trump administration to lay off government employees. “We’re doing it in a socially acceptable, sensible, and measured way.”
Green politician Ricarda Lang, known for her mischievous humour, suggested the coalition be named “BlackRot” to symbolise what she implied was a putrid combination of Merz, a former BlackRock executive whose party is represented by the colour black, and the red (or rot) of the SPD.
Armin Steinbach, professor at HEC university near Paris, said the outcome “shows that both parties have kept each other in check”.
The compromises also extended to migration, nuclear power and the car sector. The SPD failed in its attempt to impose a speed limit on the nation’s motorways. But the CDU abandoned its efforts to push back against an EU phaseout of the combustion engine.
As the only viable coalition partner for Merz, the SPD managed to extract big concessions, Steinbach said.
The centre-left party, which won just 16 per cent of the vote in February — its worst result since 1887 — secured seven cabinet positions out of 15, including the key finance and defence ministries.
Appointments to ministerial posts will be unveiled after SPD members approve the coalition agreement in a vote, which will be held in the next two weeks. Merz could then be elected chancellor in a parliamentary vote in early May.
Other analysts were more hopeful that the coalition agreement indicated a willingness to modernise.
“The creation of a ministry for digitisation and state modernisation shows the new government is serious about this,” said Henning Meyer, professor at Tübingen university.
Christian Mölling, a senior adviser at the Brussels-based European Policy Centre, said that the defence and foreign policy offerings were a mixed bag. But he praised the fact that the agreement had not specified a spending target for defence but rather focused on the capability targets. “That’s much better than putting 3 per cent or 3.5 per cent of GDP,” he said.
Germany met Nato’s 2 per cent of GDP spending target last year but Trump has called on allies to spend 5 per cent of GDP on their armed forces. A Nato summit in June is expected to raise the target to about 3 per cent of GDP.
A commitment to a longer planning for defence procurement will help support arms producers, Mölling said, giving industry “the certainty on certain projects that they will be ordered and money will be there”.
The coalition agreement paled by comparison with the “big bang” Merz pushed through last month — relaxing the country’s borrowing cap and pledging to raise up to €1tn over the next decade for the country’s defence and infrastructure, said Jens Südekum, professor of international economics at Düsseldorf’s Heinrich Heine University.
“Maybe there’s not a big bang for structural reforms but there’s a lot of space devoted to those issues. It seems that at least, the coalition got the message that we need supply side reforms to complement the fiscal package.”
He added: “The proof will come later, when we see whether or not they really implement it. But the message has been heard.”
