Highlights:
– German Chancellor Friedrich Merz's coalition with the SPD is set to usher in comprehensive reforms, including significant investments in infrastructure, green initiatives, and a modernized defense sector, reflecting a proactive approach in the face of economic and geopolitical challenges.
– The coalition deal includes tax cuts for the middle class, corporate tax reductions, and a focus on digitalization, showcasing a multi-faceted strategy aimed at boosting economic growth and technological advancement while addressing key societal concerns.
– Despite facing resistance from the Greens and internal SPD discord, Chancellor Merz's government is poised to navigate complex political landscapes, including challenges from the AfD, by prioritizing effective governance and swift implementation of key reforms to consolidate support and counter opposition from rival parties.
Summary
Incoming German Chancellor Friedrich Merz has pledged a comprehensive reform and investment agenda following the signing of a coalition agreement between his Christian Democratic Union (CDU) and the Social Democratic Party (SPD) after the 2025 federal election. Although Merz’s CDU emerged as the largest party with 28.5% of the vote, it fell short of an absolute majority, necessitating a coalition with the center-left SPD to form a stable government. This coalition deal is notable for its ambitious plans to modernize Germany’s economy, increase defense spending, and overhaul migration policy amid rising geopolitical tensions and economic uncertainties in Europe.
Central to the coalition agreement is a proposed reform of Germany’s constitutional debt brake to exempt defense spending exceeding 1% of GDP, allowing for a €500 billion investment fund dedicated to infrastructure and climate neutrality goals by 2045. The pact also includes significant tax cuts for middle- and lower-income earners, a gradual corporate tax reduction, and efforts to lower energy costs, while establishing a new Ministry for Digitalization to accelerate Germany’s technological modernization. Merz’s government aims to bolster Germany’s defense capabilities in response to heightened security challenges, signaling a more assertive foreign policy stance within Europe and transatlantic relations.
The coalition agreement has faced criticism and resistance, particularly from the Greens, over concerns about insufficient climate commitments, and from within the SPD regarding economic and migration reforms. Additionally, the far-right Alternative for Germany (AfD), which surged to second place in the 2025 elections, poses a significant political challenge, intensifying pressure on Merz and his partners to demonstrate effective governance to curb its influence. The coalition’s ability to enact key reforms before the new parliament convenes is seen as critical to overcoming potential parliamentary opposition from the AfD and The Left party.
Merz, at 69, is set to become Germany’s oldest chancellor since Konrad Adenauer and has emphasized urgent action to navigate Germany through a rapidly changing global environment. His administration’s agenda reflects a balance of economic modernization, fiscal expansion, and a tougher stance on migration and security, highlighting the complexities of coalition governance amid ideological differences and a fragmented political landscape.
Background
Following the 2025 federal election in Germany, Friedrich Merz, leader of the Christian Democratic Union (CDU), emerged as the chancellor-in-waiting after his party secured the most seats in the Bundestag, albeit with its second worst result ever, obtaining 28.5% of the vote. Despite leading the strongest party, Merz’s CDU fell short of an absolute majority, necessitating coalition talks primarily with the center-left Social Democratic Party (SPD) to form a stable government. The coalition negotiations concluded relatively quickly after about six and a half weeks, a critical period during which Germany faced political uncertainty amid pressing economic and security challenges in Europe.
The outgoing government, led by Chancellor Olaf Scholz, was a fragile three-party coalition that collapsed in November 2024 over disagreements on military and fiscal spending. This collapse heightened the urgency for Merz and his SPD counterparts to establish a government capable of addressing twin shocks to the economy and European security, particularly in light of a trade war launched by then-US President Donald Trump and growing geopolitical instability. Merz’s coalition government aimed to implement significant reforms, including amendments to the constitution and a large spending package, with a deadline to pass these by March 25, 2025, before the newly elected parliament convened. This urgency was driven in part by the risk that the far-right Alternative for Germany (AfD) party and The Left party, both opposed to increased military spending, could block such reforms in the next parliamentary term.
Merz, at 69 years old, is set to become Germany’s oldest chancellor since Konrad Adenauer, who took office at 73 in 1949. His leadership is viewed as pivotal in navigating Germany through a period of global change, with Merz expressing a clear intent to actively shape Germany’s role in an uncertain international environment. However, the rise of the far-right AfD, which secured the second-largest number of votes in the 2025 election, remains a significant political challenge. Both Merz and SPD leaders acknowledge the necessity of a successful government to curb the AfD’s influence and prevent it from gaining power in future elections. This dynamic has underscored the importance of cross-party cooperation in the German political landscape despite ideological differences.
Coalition Negotiations
Following the February elections in Germany, Friedrich Merz initiated coalition talks with the center-left Social Democratic Party (SPD) to form a government amid a fragmented political landscape. The negotiations were driven by the necessity to build a majority government after the far-right Alternative for Germany surged to second place, complicating traditional coalition options.
The coalition deal aimed to address pressing economic and geopolitical challenges facing Germany and Europe, including spurring economic growth, increasing defense spending, and implementing a tougher stance on migration. The agreement also sought to modernize Germany’s infrastructure and institutions, which had been neglected for years. Despite fundamental policy differences, especially regarding tax breaks for businesses and migration reforms, the SPD agreed to compromise on several issues, allowing the coalition talks to move forward.
However, the coalition pact faced resistance from other parties, notably the Greens, who withheld support over concerns about the lack of climate-friendly policies in the agreement. Their backing was seen as crucial for passing reforms in the outgoing parliament. Merz emphasized that reaching an agreement on his reform plans was essential before forming a coalition government, signaling his commitment to implementing his agenda despite opposition.
The coalition agreement was officially signed on a Monday, with Merz and new cabinet members set to take office shortly thereafter. The SPD’s Lars Klingbeil was expected to assume the roles of finance minister and vice-chancellor, underscoring the partnership between the two centrist parties. The coalition deal was scheduled to be presented to the German parliament with a potential vote on March 17, marking a significant step toward stabilizing Germany’s government during a period of global economic uncertainty and geopolitical tension.
Coalition Agreement Details
The incoming German Chancellor Friedrich Merz and his coalition partners signed a comprehensive agreement outlining a wide-ranging policy agenda aimed at economic growth, migration reform, and defense spending. The coalition, formed by centrist parties including the CDU, CSU, SPD, and the Greens, focuses on cutting taxes for middle and lower incomes, reducing corporate tax gradually starting in 2028, lowering energy prices, supporting the electric vehicle industry, and scrapping a contentious supply chain law.
A significant component of the agreement is the reform of Germany’s constitutionally enshrined “debt brake,” a fiscal rule long criticized for limiting economic expansion. The coalition plans to amend Paragraphs 109, 115, and 143h of the Basic Law to exempt defense spending exceeding 1% of GDP from the debt brake constraints. Additionally, a special €500 billion fund will be created for investments in infrastructure and climate neutrality initiatives targeted for completion by 2045.
Merz has emphasized a tough stance on migration, promising stricter controls and investing in advanced border technologies like license plate recognition, given current border control measures are deemed to be at their operational limit. He views EU-wide migration rules as dysfunctional and insists on implementing his migration plan immediately upon taking office. Despite some opposition within the coalition, particularly from the Greens and SPD, a consensus was reached to advance migration reforms as part of the coalition deal.
Economic modernization is a core objective, with the coalition aiming to enhance Germany’s “price competitiveness” through tax incentives and infrastructure investment, while also addressing the country’s historically high electricity costs by reducing the electricity tax to the European minimum, cutting grid fees, and introducing a favorable industrial electricity price. The Greens secured commitments ensuring that €100 billion of the infrastructure fund will support climate goals and the transition to renewable energy, reflecting a compromise between conservative and environmental priorities.
Defense spending is poised for a significant increase, reflecting Merz’s intent to bolster Germany’s military capabilities amid rising geopolitical tensions in Europe. The coalition’s reforms allow for nearly $1 trillion in new spending over the next decade, representing the largest fiscal expansion since German reunification. This includes support for defense industrial production extending beyond Germany’s borders and aligns with broader European security concerns.
The coalition agreement also includes digital transformation initiatives, exemplified by the creation of a new Ministry for Digitalization. Physicist and tech executive Karsten Wildberger was appointed to lead this ministry, which consolidates scattered digital policy efforts and aims to accelerate Germany’s digital reforms in government and industry.
Despite the agreement, challenges remain in securing full parliamentary approval, with the Greens withholding explicit support pending further climate-friendly policy commitments and ongoing negotiations with the SPD reflecting fundamental policy differences, particularly on tax breaks and economic priorities. Nevertheless, the coalition deal marks a decisive step toward implementing Merz’s agenda focused on reform, investment, and modernization from day one in office.
Chancellor Merz’s Agenda and Statements
Incoming German Chancellor Friedrich Merz has laid out an ambitious agenda focused on reform, investment, and strengthening Germany’s economic and security position. Following the signing of a coalition agreement among centrist parties, Merz emphasized a commitment to improving stability, security, and economic strength in Germany amidst ongoing global uncertainties and the continuing war in Ukraine.
Merz has prioritized significant reforms and investments aimed at spurring economic growth and modernizing the country. This includes ramping up defense spending beyond the 1% of GDP threshold through a reform of the debt brake, allowing for greater fiscal flexibility. As part of this fiscal realignment, a special €500 billion fund was established for investments in infrastructure and achieving climate neutrality by 2045. The government anticipates paying around €71 billion in interest annually starting in 2035 due to this increased borrowing capacity.
On economic policy, Merz’s coalition has agreed to reduce taxes for middle and lower incomes, lower corporate taxes, decrease energy prices, support the electric car industry, and scrap a disputed supply chain law. These measures aim to improve the overall framework conditions for Germany’s economy and enhance competitiveness across sectors.
In the realm of foreign and security policy, Merz is known for a hawkish stance toward authoritarian regimes such as Russia and China. He advocates involving key allies, notably France, in negotiations with China to adapt to a global “paradigm shift” in security. His government also intends to significantly increase defense spending, reflecting a more assertive posture in European and transatlantic security cooperation.
Merz has also emphasized reforming migration policy, pledging to largely end irregular migration with strict controls at national borders, including the rejection of asylum seekers. His government plans a “repatriation offensive,” suspension of family reunification, and expansion of the list of safe countries of origin. While these measures indicate a tougher approach, the coalition agreement preserves fundamental asylum rights and Germany’s status as a country of immigration.
In addition to these domestic and foreign policy goals, Merz announced the creation of a new Ministry for Digitalization, appointing physicist and tech executive Karsten Wildberger to drive overdue digital reforms within the government. This highlights an increased focus on technology and digital transformation as key priorities for the new administration.
Key Appointments and Institutional Changes
Chancellor Friedrich Merz has undertaken significant steps to modernize Germany’s digital governance by creating a new Ministry for Digitalization. This move aims to consolidate previously scattered digital policy competencies, streamline efforts, and enhance the effectiveness of Germany’s digital initiatives. The establishment of this ministry reflects Merz’s broader strategy to address rapid technological advancements and position Germany as a leader in the digital economy within the European Union, while also advancing technological sovereignty to reduce reliance on foreign technology.
A notable appointment within this framework is that of Karsten Wildberger, former CEO of the electronics retailer MediaMarkt, as the head of the new ministry. Wildberger’s background in the private sector, rather than traditional politics, marks an unusual but deliberate choice by Merz, emphasizing practical experience and expertise in driving digital transformation. While some critics have expressed concerns about the costs involved, supporters highlight the necessity of dedicated leadership to implement overdue digital reforms in government.
In addition to these changes, the broader cabinet includes figures such as Lars Klingbeil from the SPD, who is expected to serve as finance minister and vice-chancellor, signaling a coalition approach to governance. Overall, these institutional changes underscore Merz’s commitment to reforms and investments aimed at positioning Germany at the forefront of digital innovation.
Public and Political Reactions
The coalition agreement between Friedrich Merz’s conservatives (CDU/CSU) and the Social Democrats (SPD) following the 2025 German federal election elicited a variety of public and political responses. While the deal was necessary to establish a stable government amid global economic and security challenges, it also highlighted tensions and compromises within and between the parties involved.
Several key figures expressed reservations about the coalition’s prospects. Michael Kretschmer, Minister-President of Saxony and a CDU member, emphasized that a refusal of cross-party cooperation on substantive local-level decisions was unsustainable in a democracy, implicitly supporting the coalition despite its complexities. Meanwhile, Markus Söder, the influential conservative state premier in Bavaria, described the coalition as “not quite a marriage of love,” quipping that “love passes,” reflecting the uneasy nature of the alliance between the CDU/CSU and SPD.
The SPD, despite suffering a record-low election result of 16%, secured seven ministries in the final cabinet allocation. This outcome was widely interpreted as a reflection of Merz’s limited leverage during negotiations, as his party lacked other realistic coalition partners. The Greens, whose support was seen as pivotal for passing reforms in the outgoing parliament, withheld their endorsement, criticizing the coalition for insufficiently integrating climate-friendly policies.
Concerns about the rising influence of the far-right Alternative for Germany (AfD) also permeated political discourse. Merz himself retracted his 2018 pledge to halve the AfD’s support, arguing in June 2023 that such a goal was unattainable if the government inadvertently strengthened the party through its policies. Both Merz and SPD leaders recognized the imperative to succeed in governance to stem the AfD’s rise and prevent it from gaining power in the 2029 election. The AfD had surged into second place in the 2025 election, intensifying pressure on the coalition to present a united and effective front.
Implementation and Early Impact
Following the signing of the coalition agreement, Chancellor-in-waiting Friedrich Merz emphasized the urgency of shaping Germany’s role amid global uncertainty, signaling a clear commitment to reform and modernization. The coalition aims to accelerate economic growth, increase defense spending, adopt stricter migration policies, and address long-overdue modernization efforts within the European Union’s most populous member state. To facilitate these ambitions, Merz seeks constitutional amendments to be passed by March 25, aligning with the convening of the newly elected parliament; this timeline is critical as opposition from the far-right Alternative for Germany (AfD) and The Left party could otherwise block reforms and associated spending packages.
The rapid formation of this government, just 45 days after the snap elections, reflects the pressing need for stability amid escalating international trade tensions, notably triggered by U.S. tariffs and the geopolitical situation in Ukraine. Merz has openly criticized the previous government’s heavy focus on climate protection policies, promising a broader economic strategy that moves beyond single-sector priorities and addresses overall economic conditions. This new approach includes cutting taxes for middle and lower incomes, reducing corporate tax rates, lowering energy prices, supporting the electric vehicle industry, and repealing controversial supply chain legislation.
The coalition’s early efforts have also focused on countering the political rise of the far-right AfD, which secured the second largest vote share in the recent elections. Both Merz and SPD leader Lars Klingbeil recognize the necessity of demonstrating effective governance to prevent the AfD from gaining greater influence in the upcoming 2029 elections. As such, the coalition’s early implementation phase is characterized by a balance of ambitious reform agendas and political stabilization efforts aimed at securing Germany’s future domestically and internationally.
The content is provided by Sierra Knightley, Front Signals
