German conservatives, led by Friedrich Merz, reached a coalition agreement yesterday with the center-left Social Democrats (SPD), aiming to revive economic growth in Europe's largest economy at a time when a global trade war threatens to trigger a recession.
The agreement is the result of weeks of negotiations between future Chancellor Merck and the SPD, after his party won elections in February but fell short of a majority, while the far-right Alternative for Germany surprisingly came in second place.
The pressure to reach a deal is further heightened because the new government will take office at a time of global turmoil caused by the escalation of the trade conflict that US President Donald Trump started by introducing sweeping tariffs, Reuters points out.
During a press conference with coalition partners, Merz addressed the White House in English. "The main message to Donald Trump is that Germany is back on the right track," he said, promising to increase defense spending and strengthen the competitiveness of the German economy.
He added that the coalition agreement represents a "strong and clear signal" to both the citizens of Germany and other European countries, emphasizing: "Germany is getting a government that is capable of acting and that is strong."
The agreement highlights the importance of Germany's relationship with the US, its largest trading partner, and envisages reaching a free trade agreement in the medium term. However, Merz also stressed that the European Union must have a common response to the increasingly serious global trade war, which has particularly strained relations between the US and China.
China and the European Union announced new trade barriers on American goods yesterday in response to the high tariffs imposed by Trump. China announced that it was increasing tariffs on American imports from 34% to 84%, shortly after Trump's punitive tariffs of 104% on Chinese goods took effect, while the European Union said it would impose 25% tariffs on a range of American products in the first round of countermeasures.
“At the same time,” said Merck, “economic uncertainty is growing enormously. The American decisions of this week, in particular, have caused new shocks.”
Presenting a range of policies, the coalition agreed to cut taxes for middle and lower income earners, reduce corporate taxes, lower energy prices, support the electric car industry and repeal the controversial supply chain law.
An Ipsos poll released yesterday showed the AfD at the top of the polls for the first time with 25% support, surpassing the conservatives under Merco who fell to 24%.
They also plan to form a commission to further reform the constitutionally guaranteed spending limits known as the "debt brake," which critics have long seen as an obstacle to economic growth.
"All this is going in the right direction, but it is not a real new beginning in economic policy that would be necessary given the competitiveness that has been declining for years," Jörg Kramer, chief economist at Komercbank, told Reuters.
Coalition partners have also announced some new allocations, such as the renewal of diesel fuel subsidies for farmers.
With the Alternative for Germany (AfD) breathing down its neck, the new ruling coalition has signaled a tougher stance on migration, planning, among other things, to turn away asylum seekers at Germany's borders and abolish accelerated naturalization.
The tougher stance on migration represents a clear departure from Germany's more liberal policies pursued by Friedrich Merz's conservative predecessor, Angela Merkel, during the European migrant crisis of 2015.
The coalition also announced the introduction of voluntary military service and the formation of a National Security Council, as well as measures to accelerate the process of weapons procurement and support Ukraine's efforts to join NATO.
Merz, who is 69 and has previously called Trump's United States an unreliable ally, has already promised to increase defense spending at a time when Europe is facing a hostile Russia.
According to a document seen by Reuters, the Christian Democratic Union (CDU) would take control of the Economy Ministry and the Foreign Ministry, as well as the Chancellor's office, while the Social Democratic Party of Germany (SPD) would lead the Finance Ministry and the Defense Ministry.
This means that SPD leader Lars Klingbeil could become the new finance minister, while popular defense minister Boris Pistorius would most likely remain in the position.
The new coalition represents the only possible two-party majority that excludes the far-right Alternative for Germany (AfD), whose support has grown thanks to its populist anti-immigrant agenda.
In a blow to Merck, an Ipsos opinion poll released yesterday showed the AfD at the top of the polls for the first time with 25% support, surpassing the conservatives under Merck who fell to 24%.
After his election victory, Merck pushed through measures through parliament that allow him to borrow significantly to greatly increase spending on defense and infrastructure, as well as support for struggling German companies.
Although the move provides the new government with significant financial resources, it has drawn criticism because it departs from earlier promises of budget discipline and fiscal prudence.
Germany has already gone through two years of economic decline, and the new tariffs represent a major blow to its export-oriented economy.
“The new government must now move to the implementation phase,” Robin Winkler, Deutsche Bank’s Germany economist, told Reuters. “The agreed infrastructure investments must be launched as soon as possible to cushion the impending trade shock and prevent a third consecutive year of recession.”
The compromise coalition deal, which Friedrich Merz planned to complete by Easter, still needs to receive the support of a majority of the SPD's 357.000 members via an online vote, as well as approval from the leadership of the CDU and CSU, known as the Union.
If these conditions are met by the end of April, Merz could be sworn in before the Bundestag in early May, thus realizing his long-standing aspiration to become Germany's leader.
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