The incoming German government, led by Chancellor-designate Friedrich Merz, has presented its long-awaited coalition agreement. The pact, formed between the CDU, CSU, and SPD parties, outlines a broad and ambitious set of policy goals, aimed at modernising Germany's economy and public sector. However, the plan has already raised concerns about fiscal feasibility and long-term sustainability.
The 144-page agreement, soon to be put to a member vote by the SPD, represents a comprehensive roadmap of intentions and reforms, ranging from tax cuts to administrative streamlining. If approved, Merz is expected to officially assume office within the next month.
While the document is filled with promising economic measures, critics have noted its lack of prioritisation. In the words of ING's Global Head of Macro, Carsten Brzeski, 'the new federal government probably didn't have time to be brief, so it drafted a coalition agreement of 144 pages.' He added that 'the coalition agreement looks a bit as if the coalition parties didn't have the time (or willingness) to decide on real priorities, so they just wrote everything down.'
Among the headline measures:
- Creation of a Germany Fund aimed at supporting innovation in small- and medium-sized enterprises (SMEs) and start-ups. The fund will be seeded with €10 billion from the government, with the goal of attracting €90 billion in private investment.
- Corporate tax cuts totalling five percentage points, phased in over five years starting from 2028.
- An "innovation booster" through accelerated depreciation rules for investments during 2025 to 2027.
- Income tax relief targeting lower- and middle-income households.
- New tax-free overtime bonuses and tax incentives for those who choose to work longer in retirement.
- A cut in electricity taxes and an intended cap on energy and network prices.
- Further subsidies and tax breaks for electric vehicles, alongside regulatory reforms aimed at reducing red tape and streamlining public administration.
The agreement also builds upon a major pre-negotiation fiscal shift: a €500 billion investment package that expands fiscal capacity for state governments and allows for de facto unlimited defence spending.
While the agreement's scope is bold, analysts suggest it may quickly run into budgetary roadblocks. Brzeski cautioned, 'Many good elements, but also many short-term elements whose effects can quickly fizzle out.' He further noted that "the convenient option has been chosen: let's simply do everything – structural reforms, subsidies, and investment incentives."
The swift drafting of the agreement was seen as essential given geopolitical and economic pressures. However, observers anticipate that the real challenge for Merz's government will come shortly after taking office. 'It won't take long before the incoming government will have to do what it avoided to do now: prioritise,' Brzeski warned.
Though Germany appears set to install its new government two months after national elections, history suggests that coalition agreements often undergo significant adaptation in response to emerging challenges—both internal and external.
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