Stalled reforms and uncertainty burden the economy amid the coalition crisis

Federal Chancellor Friedrich Merz defended the 2026 budget in the general debate of the Bundestag and presented the federal government's investment line as the foundation for growth and security ⁵+149 Traders Union (Aggregator). At the 2026 IHK Conference he promoted his economic policy agenda to the chambers ¹³. At the business day of the German Wholesale and Foreign Trade Association (BGA) he emphasised new trading partnerships, greater defence capability and reforms and announced relief on fuel prices ²²+137 tagesschau.

At the cabinet retreat in early September 2026 Merz set out the mission to emerge from weak growth and announced he would increase the pace ⁵⁴. Within the Union parliamentary group, however, open resistance to the Chancellor's course is forming according to Handelsblatt reports. Several CDU MPs announced publicly that they would withhold support for planned reforms ². Independent confirmation of these parliamentary group divisions by other editorial teams is not yet available. A Handelsblatt report assesses that Germany's managers are dissatisfied with Merz but nevertheless retain hope for a change of course ⁵³.

Federal Finance Minister Lars Klingbeil (SPD) defends the draft federal budget for 2027 ²⁹. Federal Economy Minister Katherina Reiche (CDU) rejects central demands from the SPD for relief on fuel prices, including the introduction of a fuel price cap ²¹+15 Bundesregierung. At the same time her energy policy faces resistance. In a letter banks criticise her wind power plans as risky because the costs cannot be quantified. Reiche wants to reverse parts of the previous government's energy policy but commits to the energy transition ¹⁸.

In gas supply Reiche publicly declares the situation to be secure. However, according to Der Spiegel's research, attempts are being made behind the scenes at the last moment to get more gas into the historically empty storage facilities and state enterprises are to fill the storage ³⁹.

The coalition partner SPD is involved in the reform package through the coalition committee, which provides for income tax relief of around ten billion euros and an adjusted wealth tax as counter-financing ¹⁴+115 ZDF heute. In the debate on fuel prices SPD parliamentary group vice chair Zorn calls for a windfall tax on oil corporations and promises new proposals from the government's fuel task force 'in the coming days'. State intervention is necessary given price developments ³⁸.

From the opposition AfD co-chair Tino Chrupalla announced that he wants to challenge the federal budget before the Federal Constitutional Court ²⁸. According to an assessment by the aggregator swp.de AfD parliamentary group leader Alice Weidel is considered to be maintaining a wait-and-see position in the budget debate whilst the Chancellor takes the active role ³⁰.

From the business sector, several leading associations appear prominently. BDA President Rainer Dulger and ZDH President Jörg Dittrich formulated unusually clear expectations at a meeting with Merz for faster reform and warned of growing frustration in companies and trades ¹⁶. The DIHK positions itself with a call to make 2026 the 'Year of Reforms' ⁷. The BGA serves as a platform for the government's foreign economic agenda ²². The petrol station association publicly warns of price jumps up to the three-euro mark and criticises the oil corporations' approach with the words 'We are being ripped off' ⁴².

As observers and analysts of the economic consequences the ifo Institute contributes with its autumn forecast for 2026 ⁸, the European Commission with its country report on Germany 2026 ⁹, the Deutsche Bundesbank with the financial stability report ¹⁰ and the business press around Handelsblatt and Berliner Zeitung ¹+52 Handelsblatt3 Handelsblatt (Kommentar)4 Berliner Zeitung52 Handelsblatt53 Handelsblatt. The Federal Finance Ministry provides the official perspective with the progress report ¹².

Budget and Fiscal Policy

At the centre is the 2026 budget with new borrowing of around 180 billion euros, of which approximately 98 billion is in the core budget, the remainder from special funds for the armed forces and infrastructure ⁴+15 Bundesregierung. Critical economists in the Berliner Zeitung report break down the structure of the budget, particularly the scope and character of the new debts ⁴. The FAZ classifies the general debate on the budget under the heading 'The Merz Deficit' and thereby marks the critical business press perspective on the fiscal course ⁴⁸.

In parallel, the draft federal budget for 2027 was introduced in the Bundestag, which the federal government presents as 'a budget in the name of prosperity and security' and wants to secure with reforms and saving measures ²⁶+151 Radio Rur (Aggregator). Federal Finance Minister Klingbeil defends the draft publicly ²⁹, and Süddeutsche Zeitung classifies it as 'coalition in defensive mode' ³¹. According to news aggregator reports, the Bundestag started the general debate 'under pressure for Merz' ⁴⁹.

AfD co-chairman Chrupalla announced that he would challenge the budget before the Bundesverfassungsgericht ²⁸. As early as April 2026, Merz had rejected an SPD initiative to declare a budget emergency with the remark 'We have enough debts' ³⁶.

The ifo Institute expects GDP growth of 1.4 per cent for 2026, following an increase of 0.6 percentage points compared to the previous forecast, and sees recovery forces on an upswing ⁸. At the same time, the European Commission forecasts a general government deficit of 3.7 per cent of GDP for 2026, thus above the Maastricht threshold of 3 per cent, and an increase in the debt ratio from 63.5 to 65.8 per cent ⁹. The Bundesbank's financial stability report places the risks to the German financial system in this context ¹⁰.

Political Basis and Reform Package

The political situation is tense. In the vote on the pension package, according to reports from the business press and ZDF, Merz narrowly missed the target chancellor's majority of 316 votes from his own coalition and achieved 318 votes only with votes from outside the coalition. The interpretation of this process is controversial. Whilst government representatives emphasise its passing, commentators see a loss of control in parliament ²+23 Handelsblatt (Kommentar)14 ZDF heute. The state election in Saxony-Anhalt on 6 September 2026, in which the AfD became the strongest force with 43.8 per cent and the CDU sank to 17.2 per cent, is assessed by Handelsblatt as an event that might only have an impact on the capital markets with a delay ¹.

The coalition committee has approved a reform package that provides for income tax reform with relief of around ten billion euros and an adjusted wealth tax as counterfinancing. This information is based so far on a ZDF heute report. Independent confirmation is pending ¹⁴+115 ZDF heute. At the cabinet retreat in early September 2026, according to Handelsblatt, Merz stepped up the pace and set the goal of overcoming weak growth ⁵⁴.

Energy Prices, Petrol Prices and Location Costs

Prices at petrol stations remain a key political theme. According to n-tv Wirtschaft reports, petrol prices are again approaching record levels, triggered by closed shipping routes and a shut-down pipeline in Saudi Arabia, which is putting a strain on oil supplies ⁴³. The petrol station association warns of price jumps towards three euros per litre and accuses the oil companies of 'cashing in'. The federal government is also watching the development with great concern ⁴². n-tv Wirtschaft assesses the overall situation as threatening as it has not been since the start of the Iran war, because four factors that would previously have prevented a collapse of the world economy have now been significantly weakened or have disappeared entirely ⁴¹.

Chancellor Merz announced on 15 September 2026 that the federal government must take action in view of high petrol prices. However, the precise instruments have not yet been determined ³⁷+122 Bundesregierung. SPD parliamentary group deputy Zorn calls for a windfall tax on mineral oil companies and announces new proposals from the government's petrol task force 'in the coming days', saying that state intervention is necessary ³⁸. Federal Economics Minister Reiche (CDU) rejects key SPD demands, in particular a petrol price cap ²¹.

The FAZ provides a critical assessment of the debate and describes the political actors as helpless because price brakes, caps and windfall taxes would outbid each other in practice, but what is economically sensible is not technically implementable ⁴⁰. In an earlier FAZ comparison, four European strategies against high petrol prices had already been discussed ²⁰.

In energy policy, Economics Minister Reiche's course is generating additional discussion. In a letter to the minister, banks criticise her wind power plans as risky because the costs cannot be quantified. Reiche is committed to the energy transition but wants to reverse parts of her predecessor's policy ¹⁸. On gas supply, Reiche publicly declares the supply situation to be secure. However, according to a Spiegel investigation, behind the scenes there are attempts to bring more gas into the historically empty storage facilities at the last moment.

State enterprises are supposed to fill the storage tanks ³⁹. As a further location topic, n-tv Wirtschaft reports that Germany has the lowest home ownership rate in 20 years and ranks last in European comparison. High construction costs and rising interest rates are cited as causes ¹⁹.

Business Associations and Association Situation

Specific demands are coming from the business community. BDA and ZDH demanded faster reform in a top-level meeting with Merz and warned of frustration in the business community ¹⁶. DIHK supports its demand for a 'year of reforms' by pointing to weak German growth of 0.2 per cent since 2019 compared to 19 per cent worldwide and 15 per cent in the USA ⁷. At the BGA business day, Merz emphasised free trade, new trade partnerships and reforms as a growth agenda ²².

A Handelsblatt survey assessment paints a mixed picture. Germany's managers are dissatisfied with Merz but nevertheless retain hope for a change of course ⁵³. The petrol station association points up the association situation in the energy sector with warnings about three euro prices and directs the accusation of 'cashing in' at the oil companies ⁴².

International Investment and EU Budget

The federal government reports a 'substantial signal' for competitiveness. Chancellor Merz welcomed the record investments announced by the United Arab Emirates in billions in Germany as a sign of trust from international investors in the location ²³+125 Bundesregierung.

At European level, Merz positions himself confrontationally towards the EU budget. The chancellor described the Commission's proposal for the EU budget as 'simply unaffordable' ²⁷+246 New-Facts.eu (Aggregator)47 tixio Nachrichten (Aggregator) and called for cuts of hundreds of billions of euros, arguing that 'Europe needs both realism and reforms' ²⁴+234 Euractiv FR (Aggregator)44 RND.de (Aggregator). According to reports from several aggregators, Merz strictly opposes in particular a planned 60 per cent increase in the EU budget by the Commission ⁴⁵. To resolve the matter, the chancellor seeks direct talks with EU Council President António Costa on the EU budget ⁵⁰.

As early as summer, according to aggregator reports, he had effectively blocked the EU budget and pressed for reforms and Ukraine support ³³. In April 2026, he had discussed the issue with Ireland's Prime Minister Martin ³⁵. These signals, mostly documented via news aggregators, have so far been difficult for the capital market side to grasp.

The economic situation is split. On the one hand, the ifo forecast shows a brightened economic outlook supported by higher government investments from special funds ⁸, and the announced record investments from the United Arab Emirates signal visible international confidence ²³+125 Bundesregierung. On the other hand, high new borrowing of around 180 billion euros in the 2026 budget ⁴+15 Bundesregierung, the debate about the subsequent 2027 budget ²⁶+329 WiWo (Aggregator)31 SZ.de (Aggregator)51 Radio Rur (Aggregator), the deficit of 3.7 per cent expected by the EU Commission ⁹, and the Chancellor's public acknowledgement that the situation is 'very critical' in some economic sectors ⁵² weigh on fiscal credibility and increase reform pressure.

The political underpinning of this economic policy is the critical point. The narrow majority in the pension vote ²+13 Handelsblatt (Kommentar) and the publicly stated resistance within the Union faction, for which there are so far only two Handelsblatt reports ²+13 Handelsblatt (Kommentar), point to a fragile parliamentary basis. The announced constitutional challenge by the AfD against the budget ²⁸ adds an additional risk. The available reports do not assess the prospects for success of this challenge. Should the trend of fragile majorities persist, other reform projects such as the tax package decided by the coalition committee ¹⁴ will become harder to implement.

Within the coalition, concrete substantive conflicts are emerging. On fuel prices, the CDU position (Reiche rejects a fuel price cap ²¹) and SPD demands clash, particularly the windfall tax on oil companies demanded by SPD faction vice-chair Zorn ³⁸, while the Chancellor simultaneously signals readiness to act without naming an instrument ³⁷. The FAZ describes the result as 'helplessness of politics' because proposals keep trying to outdo each other but economically sound measures are technically not feasible ⁴⁰.

In energy policy, banking criticism of the Minister's wind power plans increases pressure on the financing side of the energy transition ¹⁸, and Spiegel's investigation into historically low gas storage levels ³⁹ opens a second energy policy front. The low homeownership rate ¹⁹ underscores the social dimension of high construction costs and interest rates.

The capital market side is indirectly represented in the available sources. Handelsblatt sees the Saxony-Anhalt election as a potential late stimulus for the markets ¹, but specific daily market movements in the DAX, government bonds or the euro are not documented in the available reports. Statements about reactions from rating agencies or analysts at major banks cannot be substantiated on the basis of available evidence and are therefore not specified. The n-tv assessment that the danger of a severe energy crisis is as great as it has not been since the start of the war ⁴¹ provides a risk framework for the coming weeks, but the report does not derive specific market movements from it.

For the business associations it is becoming clear that they are increasing pressure on the government without openly threatening to withdraw from dialogue. The notably clear statements from Dulger and Dittrich ¹⁶, the DIHK's rhetoric about a 'year of reforms' ⁷, and Handelsblatt's assessment that managers are dissatisfied but still hopeful ⁵³ point to an expectation horizon that goes beyond mere announcements. At the European level, Merz shifts part of the reform pressure to Brussels with his demand for cuts to the EU budget ²⁴+427 Oldenburger Online Zeitung (Aggregator)34 Euractiv FR (Aggregator)44 RND.de (Aggregator)45 ad-hoc-news.de (Aggregator) and the direct communication channel to Costa ⁵⁰, which in turn could have foreign policy repercussions.