What Germany’s New Government Means for Its Economy

In just four weeks after the anticipated elections, the new German coalition partners, the Christian Democratic Union (CDU), the Christian Social Union (CSU), and the Social Democratic Party (SPD) have struck a new coalition agreement. The election of Friedrich Merz as German chancellor on May 6, 2025, marked by an unpredicted two-round vote, ignited cautious hopes for the country’s economic comeback. 

The coalition pledges to restore Germany's global competitiveness by promising a pro-business agenda with corporate tax cuts, streamlined regulations, and ambitious energy and digital infrastructure investments. Yet, behind the optimism lies not only a fragile coalition but also an agreement with vague targets and a lack of structural reforms, raising doubts about delivery.

The Stakes for Germany’s Future

On  April 9, the CDU and its Bavarian sister party, the CSU, joined forces with the SPD to form Germany’s new governing coalition. They unveiled a 146-page agreement outlining their policy priorities for the next four years. Titled “Responsibility for Germany,” the document signals not a bold reinvention but a pragmatic response to mounting global and domestic pressure.

For the fourth time since 1990, the Union and SPD are joining forces — this time, unmistakably, as a marriage of convenience. The coalition enters office with little fanfare, marked more by pragmatic obligation than enthusiasm. Still, both parties are aligned on just one but no less challenging objective: getting Germany’s economy back on track.

For Germany not to fall into a third year of stagnation, the new government must urgently improve business conditions while also adapting to demographic shifts to generate real economic momentum. Yet even before taking meaningful action, the new government faces growing scepticism over the credibility and feasibility of its promises.

Deregulation and Economic Stimulus

The Non-Miracle Solution: Fiscal Reduction

As a first key measure, the government introduces a five-point corporate tax cut starting in 2028, phased in through five annual 1 percent cuts. While politically sensitive, they are a necessary lever to restore competitiveness. Yet many critics argue the plan is too modest and slow to make a real impact, especially as increasing budget deficits could strain the eurozone's stability. The success of this policy hinges on investor confidence and ensuring a predictable economic environment.

For multinationals, the new government intends to uphold the global minimum tax, despite the exit of the United States from the framework. This attitude could change depending on the developments of negotiations to avoid a potential trade war.

Tackling the Big Bureaucratic Burden

The COVID-19 crisis underscored the need for efficient and adaptable administration to support businesses. The Scholz administration undertook a series of initiatives, notably the Growth Opportunities Act. However, the measures fell short of the structural overhaul many had hoped for. Thus, the new coalition has signalled a renewed commitment to cutting red tape, including plans to abolish the national Supply Chain Due Diligence Act and other energy efficiency requirements, and to replace them with toned-down legal frameworks aligned with the EU frameworks.

While these announcements have sparked controversy, some criticising the risk to global human rights and the climate, they aim to streamline regulation to foster a more agile economy.

Investing Heavily at the Cost of Balance

On top of the promised investments in infrastructure and the defence sector following the tax break, the coalition agreement states that the money will be dedicated to developing industrial sectors perceived as strategic due to their high economic potential. This boost of Germany’s domestic market would reduce dependency on the United States and China.

Another key initiative of the agreement is the establishment of an additional “Germany Fund” to strengthen strategic investments. The government intends to provide €10 billion, and hopes to leverage the private financial market to mobilise €100 billion to invest in scale-up and young entrepreneurs. 

Revitalising Germany’s Industrial Backbone

The coalition agreement concentrates its support on the business sector to drive economic activity. By cutting energy costs by at least €0.05/kWh for energy-intensive industries, the government aims to lower operational expenses, making German products and services more competitive. Additionally, the expansion of the WIN initiative to over €25 billion also intends to mobilise private capital, broadening access to venture funding. 

High-income earners, many of whom are entrepreneurs themselves, are expected to benefit, especially with the potential income tax relief for higher earners announced by the CDU. Low- and middle-income earners, however, are not expected to see substantial personal gains from these changes. Tightening the Bürgergeld (Citizens' Income) labour participation requirements could reduce disposable income for some, potentially limiting their spending power despite broader economic improvements.

A Competitive Digital Agenda

After falling behind on the European and global stage, Germany aims to reposition itself as a leader in the digital economy. The coalition plans to modernise the digital infrastructure, expand public data access through the German Administrative Cloud (DVC), and promote cutting-edge technologies, such as AI gigafactories. The new Ministry for Digitalisation, headed by businessman Karsten Wildberger, is expected to “make Germany the driving force behind digitalization in Europe.”

In light of geopolitical tensions, this push serves not just as an economic imperative, but as a security one as well. Other initiatives, including advancing the digital euro, reflect ambitions to greater digital and financial sovereignty. While these initiatives aim to enable consumers to participate fully in a digital economy, investments in digital skills will be required.

Addressing the Demographic Bottleneck

Facing an ageing population and a shrinking workforce, Germany struggles to sustain economic growth and its social welfare system. The coalition plans to increase the minimum wage to €15 by 2026 and strengthen labour unions, but it falls short of addressing the deeper structural issues. In addition, pressure to take a harsher stance on migration may also impact industrial growth.

The pressure on younger generations remains high, with the pension level remaining at 48 percent until 2031, and no clear plan to reduce this burden. While the Frühstarterrente (early start pension) aims to help younger workers save for retirement, its impact on demographic challenges remains unseen.

What Germans Can Expect

The agreement might not be as ambitious as some have hoped. However, it has the potential to trigger an economic momentum that will ensure that businesses and incomes remain secure in the long run. Concrete actions must follow to convince investors and economic actors that things are about to change. Coupled with geopolitical tensions, Germany will have to work on creating closer ties within Europe first to promote European strategic sovereignty and expand its circle of partners to remain competitive internationally.

Despite planned measures, Germany's growth is now projected at just 0.1 percent, a sharp downgrade from the 0.8 percent forecast by German economic institutes in September. Economists’ more optimistic forecast of just over 1.0 percent growth for 2026 was made under the assumption of relative stability, which, under the threat of trade war with the U.S. and ongoing war in Ukraine, cannot be guaranteed.

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