^{Source: France 24}

Berlin Seals Government Deal Ahead of Economic Storm

Germany’s leading centrist parties have officially struck a coalition agreement, setting the stage for a new federal government just as Europe braces for the economic fallout from sweeping U.S. tariffs introduced by President Donald Trump.

The coalition — uniting the Christian Democratic Union (CDU), its Bavarian sister party Christian Social Union (CSU), and the center-left Social Democratic Party (SPD) — is now pending final approval from party members. Once ratified, the alliance will install Friedrich Merz of the CDU as the next Chancellor of Germany, replacing outgoing SPD Chancellor Olaf Scholz.

“This coalition agreement signals a fresh start and a firm commitment to national and European stability,” Merz stated at a press conference on Wednesday. “We’re building a government ready to reform, invest, and defend Germany’s role in a rapidly shifting world.”

Months of Negotiation Culminate in a Crucial Alliance

Following the February 2025 federal elections, the CDU/CSU emerged with 33.2% of the vote, beating out the SPD’s 21.6%, and the far-right Alternative für Deutschland (AfD), which surged into second place with 27.1%, a political shock across Europe.

Coalition talks began in March but were quickly bogged down by deep policy divides over taxation, federal budgeting, and immigration reform. The CDU faced internal pressure not to yield too much ground to the SPD, while the SPD demanded more social protections and public spending.

Despite challenges, the coalition reached consensus on several key reforms:

• Tax simplification for SMEs and startups
• Increased defense spending to meet NATO’s 2% GDP target
• A €40 billion stimulus package focused on green tech and energy transition
• Stricter but fairer migration rules aligned with EU humanitarian standards

Trump’s Trade Blitz Sends Shockwaves Through Berlin

The timing of the coalition deal could not be more critical. Just hours earlier, President Trump announced massive new tariffs targeting America's key trading partners:

• 104% tariffs on Chinese imports
• 20% tariffs on EU goods
• 24% on Japanese exports
• 25% on South Korean products

Germany, Europe’s largest exporter, stands to suffer disproportionately — especially in auto manufacturing, industrial equipment, and chemicals, which together account for over €600 billion in annual exports.

“The U.S. decision has created immediate volatility across global markets,” Merz said. “Germany must respond with resilience and leadership. This coalition is our answer to uncertainty.”

Indeed, following the tariff announcement:

• The euro dipped 0.7% against the U.S. dollar
• Germany’s DAX index fell 1.8%, wiping out €22 billion in market value
• German 10-year bond yields dropped by 7 basis points, as investors fled to safe-haven assets

Economic & Geopolitical Crossroads for Europe

This coalition takes office not just amid economic strain, but also under the shadow of military and diplomatic tension.

With Russia’s war in Ukraine dragging into its fourth year and U.S. support for NATO and Ukraine no longer guaranteed, Germany is under pressure to increase defense spending and assert more leadership within Europe.

“The global order is shifting — and so must we,” Merz declared. “Our coalition stands not just for economic growth, but for defending liberal democracy and European unity.”

The coalition agreement includes:

• €15 billion defense modernization plan
• Expanded partnerships with France, Poland, and the Nordic countries
• Increased diplomatic engagement in Asia and Africa to diversify trade partners

Looking Ahead: Markets, Reforms, and Stability

With the coalition finally in place, Germany is expected to move swiftly to stabilize its economy and reassure both domestic and international markets.

The new government will face critical milestones within the first 100 days:

• Passing a €550 billion annual budget that balances growth with fiscal discipline
• Launching Germany’s Green Innovation Act, incentivizing clean tech industries
• Negotiating with the European Commission and U.S. counterparts to reduce tariff tensions

Investors and analysts are watching closely. Morgan Stanley forecasts that if Germany can implement its proposed reforms, GDP growth could reach 1.6% in 2025, even under the strain of U.S. tariffs.

But failure to act quickly may deepen Europe’s divide, and allow political extremes to gain more ground in upcoming EU parliamentary election.

‍

Germany’s new centrist coalition is more than just a political partnership — it’s a test of leadership at a time when Europe’s economic, security, and diplomatic future hangs in the balance.

As the world adjusts to a volatile geopolitical and financial landscape, Berlin’s next steps will shape not only the nation’s fate, but the trajectory of the entire European Union.

‍