Germany’s political landscape witnessed a major shift on April 9, 2025, as the conservative CDU/CSU bloc, led by Chancellor-in-waiting Friedrich Merz, and the center-left Social Democrats (SPD), headed by Lars Klingbeil, finalized a coalition agreement. The deal is seen as a strategic move to reinvigorate the German economy, modernize governance, and respond to growing challenges in trade, security, and immigration.
The coalition agreement outlines an ambitious roadmap to strengthen Germany’s economic stability amid global financial uncertainties. A key priority is the pursuit of a free trade agreement with the United States, alongside renewed support for the European Union’s trade pacts with Mercosur and Mexico. These efforts aim to open new export avenues and reinforce Germany’s role as a global trading powerhouse.
In energy policy, the new coalition plans to tackle high electricity prices by expanding gas-powered infrastructure and allowing carbon capture and storage technologies. This marks a significant step toward balancing Germany’s energy transition with industrial competitiveness.
Economic reforms also include modernizing the country’s fiscal framework. The government aims to reform the constitutionally enshrined “debt brake” to allow more flexibility for public investment, especially in infrastructure and technology. Corporate taxes are set to be lowered to enhance business competitiveness, and the value-added tax (VAT) for the hospitality industry will be cut from 19 percent to 7 percent by 2026.
On labor policies, the coalition proposes several measures to boost productivity and workforce participation. Tax-free overtime pay and financial incentives for retirees who continue working are among the key initiatives. In a major boost to low-income earners, the minimum wage is expected to rise to 15 euros per hour by 2026.
In terms of defense, Germany will ramp up military spending to meet NATO’s 2 percent target. Plans are also in place to reintroduce voluntary military service and overhaul procurement procedures to enhance operational efficiency and readiness.
The agreement also addresses rising concerns over illegal migration. Germany intends to coordinate with European partners to reject asylum seekers at land borders, particularly those who have already registered in other EU countries. Family reunification rights for individuals with subsidiary protection will be suspended for two years, and the government will begin deportations to Syria and Afghanistan, prioritizing individuals with criminal records or those deemed national security risks.
The coalition reaffirms Germany’s climate commitments by endorsing the EU’s goal of reducing emissions by 90 percent by 2040. The plan also includes restrictions on the use of international carbon credits to ensure more domestic climate action.
Economists and analysts have expressed mixed views on the coalition’s strategy. While many have welcomed the planned tax reforms and investment incentives, there are lingering concerns about the overall financing of these initiatives. Some argue that deeper structural changes are needed to ensure long-term economic growth and resilience.
With the German economy forecast to grow by only 0.1 percent in 2025, the coalition agreement comes at a pivotal moment. The new government faces mounting pressure to implement swift and effective reforms to secure Germany’s position in a rapidly evolving global order. The agreement, which blends economic pragmatism with tough migration controls and renewed defense commitments, sets the stage for a transformative era in German governance.