Merz Equation: Conservative Mandate, Social Commitments, Geopolitical Constraints

Germany is entering a new political phase, not only due to the shift in parliamentary power following the recent Bundestag elections, but also because of profound structural challenges which are redefining the country’s role in Europe and the wider world. Faced with economic stagnation, increasing migration pressures, and Donald Trump’s return to the White House, Berlin is confronted with a series of formidable challenges: modernising the state, restoring economic competitiveness, and recalibrating the balance between national interest and European responsibility.

On April 9, the leaders of the CDU/CSU and SPD presented a 144-page coalition agreement, a voluminous and politically significant document. The agreement delineates the framework for the incoming government’s agenda and allocates ministries among the three constituent parties. 

The Bundestag is expected to elect Friedrich Merz as chancellor on 6 May.

The coalition agreement begins with a strong focus on economic recovery, tax cuts, energy policy, and state modernization. A separate chapter is dedicated to combating illegal migration. The document also declares that the progressive social policy agenda of the previous administration are to be continued. Defence and foreign affairs come only in the fifth chapter, reflecting their secondary importance for this coalition.

Key economic measures include stepwise corporate tax reductions (from 15% to 10% by 2028), lower personal income taxes for middle- and low-income earners, and energy price relief via lower VAT on electricity and gas. These reforms are designed to revive economic growth after two years of recession, with a target of increasing potential GDP growth to at least 1%. However, early assessments warn of a possible budget shortfall of up to €50 billion.

On migration, the agreement features strict rhetoric and outlines plans for increased deportations—including to Syria and Afghanistan. Accordingly, the deportation infrastructure is to be expanded and social benefits for asylum seekers reduced. A CSU-led interior ministry will be responsible for implementation. The new government also commits to limiting illegal border crossings in coordination with neighbouring states, though interpretations of this clause differ between coalition partners.

Winners and Losers 

Despite receiving only 16% of the vote – the worst electoral result for the party in 138 years – the SPD has managed to secure seven ministries, including those of finance, labour, and defence. A significant portion of this success is attributed to the efforts of party co-leader Lars Klingbeil, who was instrumental in leading the negotiations. The SPD achieved significant programmatic influence, particularly in the domain of social policy, as evidenced by the preservation of pensions at 48% of average earnings, the expansion of student aid, and the provision of tax relief to low-income earners.

CSU, despite being the most diminutive coalition partner, also achieved success. The party successfully secured the interior and agriculture ministries, and embedded into the agreement a suite of measures benefiting its Bavarian electorate: favourable pension adjustments for mothers, VAT reductions for restaurants, and enhanced commuter subsidies.

Conversely, certain members of the CDU have accused Merz of making excessive concessions. The aforementioned points pertain to the circumvention of Germany’s constitutional debt brake (a commitment previously made by Merz to uphold), tax reforms that fail to meet expectations of the well-off voters of the German right, and ineffective enforcement provisions concerning welfare conditionality – another change expected by the right-wing electorate.

Political Risks

The formation of the coalition coincided with a decline in the poll ratings of the CDU/CSU and a surge in support for the far-right AfD, which reached 25% in an Ipsos poll published on 9 April — surpassing the CDU/CSU for the first time. Within the CDU, there has been a noticeable increase in scepticism towards Merz, primarily due to his advocacy for substantial off-budget investment funds and the perceived inadequacy of his assertiveness in promoting conservative priorities during coalition negotiations.

CSU’s position is consolidated, with its leadership having approved the coalition deal with alacrity. CDU, by contrast, is experiencing internal strains. The ideological diversity of the party is evident in its range of perspectives, spanning generations and geographical locations. It is evident that the political orientation of Eastern regional branches and younger politicians is frequently aligned with centrist or progressive positions. In contrast, the traditional base demonstrates a steadfast adherence to economic orthodoxy and social conservatism.

A key figure to observe in this regard is Jens Spahn, a potential leader of the CDU/CSU parliamentary group in the Bundestag and an internal rival of Merz. The nature of their working relationship has the potential to influence the coalition’s legislative effectiveness.

Transatlantic Tensions

The agreement identifies transatlantic relations as foundational, yet acknowledges evolving dynamics. After the return of Donald Trump, Germany declares the intention to assume a more substantial responsibility within NATO. The proposed tripartite security format with France and the UK, as well as increased defence spending exempted from the debt brake, reflects this recalibration.

The agreement also endorses majority voting in EU foreign and security policy and calls for strengthening the European pillar of NATO. These priorities have been established in response to concerns regarding American disengagement from Europe.

In terms of trade, Berlin continues to adopt a cautious approach. The recent opposition to the introduction of a digital tax on U.S. tech firms, despite its genesis in the previous government, serves to illustrate the continued presence of economic sensitivities. Nevertheless, the new government plans to pursue a strategy of reduced dependency on China and advocates a broader Indo-Pacific approach.

Poland?

Poland occupies a notable position in the agreement. The country is listed in conjunction with France as a priority partner, with the Weimar Triangle being cited as a pivotal coordination forum. The agreement encompasses commitments to augment transport infrastructure, honour Polish victims of the Nazi occupation, and fortify bilateral collaboration through institutional frameworks such as the German-Polish House.

However, Poland is not included in the proposed Franco-British-German security format. This omission may give rise to concerns in Warsaw regarding its inclusion in core European strategic decisions.

With regard to the issue of migration, Merz has indicated that the CSU will assume a leading role. This could create space for alignment with Polish policies, especially regarding border security. However, significant discrepancies persist with SPD, particularly with regard to matters such as family reunification and the provision of protection to refugees.

Pragmatic Adjustments

Germany’s energy transition (Energiewende) continues, albeit with revisions. The coalition has committed to the further expansion of renewable energy sources, in addition to providing support for gas-fired power stations and the exploration of carbon capture and storage (CCS) technologies as a means of achieving decarbonisation targets. There are no plans to reverse the nuclear phase-out, nor to accelerate coal exit beyond 2038.

The overarching objectives of the climate agenda remain formally unaltered; however, the emphasis is now being redirected towards the alignment of decarbonisation with industrial competitiveness and social fairness. ETS remains the favoured instrument, with revenues earmarked for energy price relief and green technology subsidies.

Defence, Security, and Institutional Reform

The agreement places a premium on national security, delineating Russian aggression as the primary threat. The plans encompass the introduction of a new federal police law, investments in cyber defence, and upgrades to counterintelligence capabilities. The establishment of a National Security Council within the Chancellery is to be initiated. During the deliberations on the matter of mandatory military service, the consensus was reached to adopt a voluntary Swedish-style model.

The coalition has also outlined plans for internal institutional reform, including the strengthening of federal coordination across Germany’s Länder. This is particularly pertinent in domains such as migration, public safety and education. The objective is to enhance administrative efficiency without implementing a comprehensive overhaul of Germany’s federal structure, at least in the immediate future.

The coalition agreement is indicative of adaptation rather than transformation. The proposed changes made by the new administration have been described as “modifications” which “largely preserve” the course set by the previous government. The implementation of this initiative is contingent upon the individual ministers’ personalities and the relative priorities they assign to it. In the context of challenging political and economic conditions, party leaders are expected to play a pivotal role in fostering cohesion within the party.

The CDU/CSU-SPD coalition has been reduced from three parliamentary factions to two, which may result in a simplified governance structure. Nevertheless, the alliance may be vulnerable to strain from two sources: first, from the far right; and secondly, from economic headwinds. The upcoming state elections in Saxony-Anhalt and Mecklenburg-Western Pomerania, in which the AfD is leading in some polls, will provide early indications of voter sentiment.

For Friedrich Merz, the forthcoming months will be pivotal. Should the new government succeed in stabilising the economy, controlling migration, and reducing bureaucratic burdens, Merz would be in a position to credibly present himself as a reformer. However, any failure, particularly in the face of persistent pressure from the AfD, it has the potential to expose underlying divisions within the coalition and the CDU itself.

The direction of Germany under Merz remains undetermined. The present situation is such that the Chancellor is faced with the challenge of demonstrating that the assertion “Germany is back” is not merely a campaign slogan, but rather a genuine reflection of the current state of affairs. This objective can be achieved through the implementation of bold measures in conjunction with a prudent approach.

Cover photo: Friedrich Merz at a public event in Erfurt, August 2024.

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