Analysis-German coalition unruliness threatens Merz's reform agenda

By Sarah Marsh and Andreas Rinke

BERLIN (Reuters) -German Chancellor Friedrich Merz is struggling to push through two key policy proposals on pensions and military service, in a setback fuelling concerns that some of the political instability seen in France could soon echo in Europe's largest economy.

Merz's conservatives and the centre-left Social Democrats had promised to provide more stability when they formed their "marriage of convenience" five months ago after the collapse of a fractious three-way coalition.

A historic spending package agreed before they took office helped smooth the path for a coalition, giving a certain fiscal leeway for them to achieve their differing goals.

But the coalition, which only has a slim parliamentary majority, has been beset by tensions since day one, when Merz became the first ever chancellor to fail to be elected in the first round of voting.

While the coalition leaders have a good working relationship, they are struggling to keep their lawmakers in line. Many within Merz's own conservatives are disappointed at the degree of compromise needed when their campaign promised radical change - making secret ballots, like the one to elect the chancellor, particularly risky, lawmakers told Reuters.

CHALLENGES FACING GERMANY

Merz, who had no government experience prior to taking office as chancellor, has taken a hands-off approach towards infighting both within the coalition and his own party.

"If the coalition continues in this way, it will not be able to effect any meaningful change," Philipp Koeker, political scientist at the University of Hanover.

Analysts say governance is being complicated by distrust between and within the parties, ideological misalignment, a lack of governing experience in Merz's cabinet, and the scale of the challenges facing Germany.

Yet the coalition needs to move fast as the economy is facing its third year of contraction and the unreliability of its top security partner, the United States, makes it all the more vulnerable to growing Russian security concerns.

RISE OF THE FAR RIGHT

The bill reintroducing voluntary military service and opening the door to a reintroduction of the draft is urgently needed, for example, to help boost Germany's long-neglected armed forces, say its proponents. Defence Minister Boris Pistorius has pledged that it would take effect in 2026 - a timeline that now looks at risk.

The latest turbulence in Germany comes after multiple collapses of French governments in the past year, raising the prospect of political paralysis and a further rise in support for the far-right in both the EU's two top economies.

Support for the Alternative for Germany (AfD) has surged in tandem with a drop in support for the conservatives and SPD and the far-right party now frequently polls first place nationwide.

Lawmakers from the conservatives' youth faction warned last week they would withhold support for the pension bill, one of the party's flagship compromises with the SPD that freezes pensions through 2031 while incentivising people to work for longer.

They argue it cements benefits without fixing the financing as Germany ages, leaving young people to foot the bill.

BRINGING BACK MILITARY SERVICE?

Meanwhile, conservative and SPD lawmakers sought to rewrite the defence minister's bill on the introduction of military service even before he could introduce it to parliament.

With the SPD seeking a voluntary scheme and the conservatives demanding some kind of draft, senior lawmakers agreed on a "lottery" to call up men in case not enough young people signed up.

But Pistorius rejected the "lazy compromise", prompting the parties to cancel a joint news conference at the last minute.

While the coalition is expected to eventually find new compromises on both bills, analysts fear they could be messy, slow to come and trust between parties has already been broken.

Merz has been criticised for his reluctance to intervene - for example when his conservatives torpedoed the SPD's choice for a constitutional court judge already agreed by party leaders - a move that dented SPD trust in their coalition partner.

Critics accuse him of focusing on foreign policy, earning him the moniker "Aussenkanzler" or "foreign chancellor" for his foreign policy successes - at the expense of domestic politics.

Merz has built a rapport with Donald Trump despite the U.S. president's frustrations with Germany over its trade surplus and defence spending, and helped improve tense relations between Trump and Ukrainian President Volodymyr Zelenskiy.

Merz's approval ratings have dropped by roughly 12–15 points since June to around 27%, far behind those of his two predecessors in the same period, making him one of the least popular chancellors in recent memory.

(Reporting by Sarah Marsh and Andreas RinkeEditing by Ros Russell)