Germany’s Merz forms coalition as Trump tariffs raise recession fears

German conservative leader Friedrich Merz has secured a coalition deal with the centre-left SPD, just as U.S. tariffs under President Trump increase the risk of a global recession.

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 just as a global trade war threatens recession.

The deal caps weeks of haggling between chancellor-in-waiting Merz and the SPD after he topped elections in February but fell well short of a majority, with the far-right Alternative for Germany surging into second place.

Pressure to reach a deal has taken on new urgency as the government will take charge at a time of global turbulence in an escalating trade conflict sparked by U.S. President Donald Trump's sweeping import tariffs.

The conservative CDU-CSU bloc and the SPD will present their agreement to form a new government at 3:00 p.m. (1300 GMT), the CSU party said.

Merz, who called Trump's U.S. an unreliable ally, has already vowed to build up defence spending as Europe faces a hostile Russia, and to support businesses struggling with high costs and weak demand.

He has also pledged to get tougher on migration, moving Germany away from a more liberal immigration policy under his conservative predecessor Angela Merkel during the 2015 European migrant crisis.

The coalition deal must still be ratified by a vote of the SPD's membership.

If they back the deal, the chancellorship would return to conservatives after the three-year interregnum of the SPD's Olaf Scholz, whose tenure was marked by the economic and political fallout of Russia's full-scale invasion of Ukraine in 2022.

As details of the coalition deal began to leak out, a source said Germany will lower corporate tax from 2028 and reform welfare payments.

The CDU was set to take charge of economy and foreign ministries as well as the chancellery, while the SPD would take charge of finance and defence, according to a document seen by Reuters.

That puts SPD leader Lars Klingbeil in the frame to become finance minister and likely leave popular Defence Minister Boris Pistorius in place as a holdover from the outgoing government.

"The CDU and SPD will be aware of pressure in the opinion polls and mounting economic pressure from the US tariffs," said Jacqueline Sengelhoff, Senior Analyst, Corporate Intelligence, S-RM.

Wednesday's announcement is within a "self-imposed Easter deadline, underscoring the urgency of the situation they find themselves in," she said.

AFD TOPS POLL

German economic institutes have cut back their forecast for this year's growth to 0.1% from the 0.8% they had expected in September, sources told Reuters on Tuesday. Germany has endured two years of contraction already and the tariffs are a sharp blow to its highly export-focused economy.

Merz told Reuters this week that the tariff-induced chaos on global financial markets made it all the more important to form a government quickly, a sentiment echoed by the outgoing Finance Minister Joerg Kukies of the SPD.

"A possible trade conflict increases the risk of recession, there is no question about that," Kukies told Deutschlandfunk radio.

He said the coalition partners had already agreed to support a free trade zone between the European Union and the United States, while being open to further cross-border trade deals.

The coalition is the only possible two-party majority that excludes the AFD whose support has surged on a nativist, anti-migration agenda.

In a blow to Merz, a survey by Ipsos released on Wednesday showed the AfD topping the polls for the first time with 25%, overtaking Merz's conservatives who slipped to 24%.

It follows another poll by the Forsa institute, which showed 60% of respondents said Merz was not fit to be chancellor, including 28% of CDU/CSU voters.

After winning the election, Merz pushed measures through parliament to allow him to unleash a borrowing bonanza to fund a big boost in defence and infrastructure spending and support struggling German companies.

But the move, while providing his new government with a massive windfall, received criticism including from some of his own supporters for pivoting away from a promise of fiscal rigour.

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