Facing Trump tariff threat, Germany’s new government bets big on boosting economy

Facing Trump tariff threat, Germany’s new government bets big on boosting economy

 

Friedrich Merz’s new administration promises tax cuts, energy price reductions and a blitz of public-private investment funds.

 

April 10, 2025 4:14 am CET

By Tom Schmidtgen

https://www.politico.eu/article/facing-huge-trump-tariff-hit-germany-new-government-bets-big-boosting-economy/

 

BERLIN — U.S. President Donald Trump's on-again-off-again moves to impose huge tariffs — looming over €161 billion of annual German exports to America — could hardly have come at a worse time for Europe's biggest economy as it teeters on the brink of a third straight year of recession.

 

Little wonder, then, that Wednesday's newly minted coalition agreement for the incoming administration of Chancellor-designate Friedrich Merz focused heavily on a wholesale economic reboot.

 

Merz has already sent a clear message to the continent that Berlin is out to shake off its fiscal conservatism, relax its notorious debt brake and inject hundreds of billions of euros into its infrastructure and defense as Trump wavers on U.S. commitments to European security.

 

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 reductions and a blitz of public-private investment funds.

 

At its heart is the promise — or gamble — that Germany can regain its competitive edge as global headwinds intensify.

 

"First of all, 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, particularly given Trump's global tariff barrage.

 

Merz is framing the coalition agreement as a pro-growth manifesto.

 

A "Germany Fund" will be seeded with €10 billion of public money, while an ambitious pitch to private investors aims to increase this to €100 billion to support start-ups and scale up enterprises. The government is also promising an "investment booster" — a corporate tax write-down to encourage investment.

 

"The future coalition will reform and invest to make Germany ... economically stronger. And Europe can also rely on Germany," Merz said.

 

The parties promise to lower electricity taxes, reduce grid fees, abolish a levy on gas prices and introduce an industrial electricity rate — all in the name of reviving industrial production. Voluntary overtime is to be made tax-free.

 

The coalition agreement also declares the steel industry to be of "key strategic importance" and endorses carbon capture and storage technology, while promising tax breaks for electric vehicles.

 

While the headlines herald reform, many of the key measures come with delays or caveats, however. A gradual cut in corporation taxes, for example, from 15 percent to 10 percent, won't start before 2028.

 

All about the funding

The pact between the parties carries the existential warning that "all measures in the coalition agreement are subject to financing."

 

And there's the rub: That funding is far from guaranteed.

 

The government plans to cut public funding by €1 billion this year and reduce administrative costs by 10 percent by 2029 — with an 8 percent cut in the number of civil servants, excluding security forces. A sweeping review of subsidies and support programs is also underway.

 

A politically sensitive U-turn is hidden in the fine print. The coalition will reinstate the agricultural diesel rebate, whose abolition sparked mass protests by farmers in the winter from 2023 to 2024. Electricity taxes will fall by five cents per kilowatt hour — a long-awaited concession in a country with some of the highest energy prices in the EU.

 

The biggest ideological victory for the conservatives may be the announced repeal of the National Supply Chain Act, a signature Social Democrat policy enacted just two years ago to press companies to vet the sourcing of their goods more rigorously.

 

Cautious optimism

The response from economists has been cautiously optimistic, but tempered with a dose of skepticism.

 

Michael Hüther, director of the Cologne-based Institute for Economic Research, called the electricity price reforms a "strong signal" to domestic industry in the face of global volatility.

 

The slow-burning corporate tax cut, he said, "also gives hope."

 

But he criticized a perceived lack of clarity. "Large parts of the coalition agreement read vaguely, and the lines of conflict between SPD and CDU/CSU are very clear, for example on income tax. More courage would have been better here."

 

Marcel Fratzscher, president of the German Institute for Economic Research, was more blunt.

 

"There is a lack of ambition," he warned. While praising certain aspects of the coalition deal, including infrastructure investment and reform of the defense debt brake, he lamented the lack of a broader tax overhaul and the underwhelming emphasis on Europe's strategic role.

 

More damningly, Fratzscher cast doubt on whether much of the agreement would actually be realized. "There is a lack of clear implementation strategies," he said.

 

The bottom line is that Merz is staking his leadership on the hope that tax cuts and energy reform will turn the economic tide. But with a fragile budget, internal coalition rifts and a skeptical business community, execution will be everything.