Published by Global Banking & Finance Review®
Posted on April 9, 2025
4 min readLast updated: January 24, 2026
Add as preferred source on GoogleGermany's coalition government outlines key policies on trade, energy, debt, labour, and defence to boost economic growth.
BERLIN (Reuters) - German conservatives under Friedrich Merz agreed a coalition deal with the centre-left Social Democrats (SPD) on Wednesday, aiming to revive growth in Europe's largest economy.
Here are the key policy measures agreed by the two parties:
TRADE
Germany's next government said it would aim for a medium-term free trade deal with the United States, stressing that transatlantic relations were of utmost importance.
In the short term, the parties want to avoid trade conflicts with the U.S. and focus on reducing import tariffs on both sides of the Atlantic.
The government will back, and swiftly ratify, EU agreements with Mercosur and Mexico, and supports concluding free trade talks with India, Australia and ASEAN countries.
ENERGY
Electricity prices, the highest in Europe, will be lowered by at least 5 cents through a reduction in electricity tax and grid fees. The parties agreed to introduce incentives to build up to 20 gigawatts of gas power plant capacity by 2030 and to adopt a legislative package to allow carbon capture and storage, including for gas-fired power plants.
They also want to abolish a controversial heating law that aimed to phase out fossil fuel heating and will scrap a gas storage levy that Berlin introduced in 2022 to cover the costs of replacing Russian gas after Moscow cut deliveries.
DEBT BRAKE AND TAX
The government will establish an expert commission with the participation of the German Bundestag lower house of parliament and the federal states to develop a proposal for modernising the debt brake, which restricts public borrowing to 0.35% of gross domestic product. A reform is promised by the end of 2025.
A reform of the corporate tax system will be initiated, and the corporate tax rate will be reduced by one percentage point per year for five years from 2028, with a 30% depreciation allowance for equipment investments between 2025 and 2027.
The value-added tax (VAT) on food in restaurants will be lowered to 7% permanently from 2026, from a current 19%.
LABOUR
To incentivise work, the government will make overtime pay tax-free and offer tax benefits for those working beyond retirement age, with up to 2,000 euros ($2,200) monthly income being tax-exempt for retirees who continue working.
There will be a reform of unemployment benefits and stricter sanctions for those refusing to work.
A minimum wage of 15 euros per hour from 2026 is seen as achievable, although that is a decision by the independent minimum wage commission.
DEFENCE
The government will ramp up defence spending "significantly" over the next four years to meet NATO targets for troops and weapons.
Germany will introduce a new military service, for now on a voluntary basis, after suspending conscription in 2011.
The readiness of forces will be stepped up, and they will be fully equipped with weapons and other equipment.
The government commits to the continued support of Ukraine.
Within the first six months in office, the coalition will pass a law to speed up defence procurement and simplify procedures.
In cooperation with European partners, the standardisation of military equipment will be driven forward to capitalise on economies of scale.
MIGRATION
The parties want to suspend family reunification for people with a so-called subsidiary protection status for two years and to end all federal admissions programmes for refugees and not establish new programmes in the future.
Asylum seekers will be rejected at land borders in coordination with European neighbours, and Germany will start deporting people to Syria and Afghanistan, starting with criminals and potentially dangerous persons.
It will abolish the "turbo naturalisation" of migrants after three years of stay but will maintain the citizenship reforms introduced by the previous government.
CLIMATE
Germany backs a binding EU climate target to cut net emissions 90% by 2040 and let countries use international carbon credits to meet just three percentage points of the goal - meaning the rest of the target must be met by domestic industries. The move will pressure other EU countries, which have warned a 90% goal would be too ambitious for industries.
(Reporting by Riham Alkousaa, Maria Martinez, Kate Abnett and Sabine Siebold, Editing by Miranda Murray and Ros Russell)
The article discusses the key policy measures agreed by Germany's new coalition government.
Germany aims for a free trade deal with the US and supports EU agreements with Mercosur and Mexico.
The government plans to reduce electricity prices and introduce incentives for gas power plants.
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