While the dust has barely settled from Germany’s early election—called more than three months before its required date—the political landscape is already rapidly shifting. Their previous governing coalition dissolved over differences on budgetary, fiscal, and economic policy. To address these differences, the coalition leaders signed a new coalition agreement on May 5, 2025. Friedrich Merz, the leader of the Christian Democratic Union (CDU), is set to assume chancellorship.
This new coalition agreement unites the CDU-CSU and Social Democratic Party (SPD), following a divisive political climate. The new government is off to a good start with impressive senior appointments. Lars Klingbeil as finance minister and vice chancellor economy minister will be Katherina Reiche. Johann Wadephul takes over as foreign minister, Boris Pistorius remains as defense minister.
The rise of the far-right Alternative für Deutschland (AfD) party as a new political power was perhaps the most striking aspect of the election. They won the second-most votes. As the coalition deal unfolds, Markus Söder, Bavaria’s State Premier and leader of the conservative Christian Social Union (CSU), holds considerable influence in shaping the new government.
The CDU-CSU/SPD coalition represents a pretty dramatic change in Germany’s fiscal policy—a change that may be felt even before the coalition officially takes office. The fiscal package brings sweeping changes to Germany’s debt rules, allowing for further debt-financed defense spending. In tandem, it sets up a 500-billion-euro ($567.5 billion) fund to invest in infrastructure and climate-related priorities.
Friedrich Merz of the FDP pledged to be proactive on this issue when announcing the coalition agreement.
“Tomorrow you will get … a government that is determined to move Germany forwards with reforms and investment,” – Friedrich Merz
Political journo’s believe Merz and Klingbeil will play a key role in determining the government’s agenda. Holger Schmieding of Berenberg Bank referred to their ability to galvanize, in recent leadership positions.
“In the new government, Merz and the undisputed leader of the SPD, new finance minister Lars Klingbeil, will be calling the shots. What these two leaders agree will likely get done, with some occasional sniping from Bavarian CSU boss Markus Söder,” – Holger Schmieding
As the clock ticks on Merz’s expected parliamentary vote into office, Olaf Scholz will be formally removed from office. The new governing coalition will have to walk a fine line between Germany’s highly fragmented political landscape and urgent fiscal and economic pressures.
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