Merz Has Activated His Plan to Fix Germany. Now We’ll Find Out If It Works

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There are two strands to the government’s efforts. On the one hand, it is scrambling to deploy a €500 billion ($580 billion) infrastructure fund in a country that struggles with major projects, as well as retooling its depleted military.

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Meanwhile, the coalition has pledged further steps to improve domestic conditions, all the more important given doubts around Germany’s export-driven business model. That’s where investors want to see progress. 

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“For German equities, accelerated depreciation, higher pension allocations into equities, lower energy prices and less regulation are clearly supportive,” Deutsche Bank’s head of European equity and cross asset strategy, Maximilian Uleer, said in a note to clients.

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Official forecasts released this week now foresee growth of 1% this year. Fitch predicts 1.2%, and reckons underlying investment indicators are already showing tangible signs of improvement, even if business confidence isn’t yet following suit. 

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“In the places where you’d expect to start to see it, it does feel like we are seeing something,” Coulton said. “It could easily become more self-sustaining.”

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But too often, Germany has shown signs of life, only to stumble. Dirk Schumacher, chief economist of development bank KfW, anticipates a “significant” impact this time, while acknowledging the possible pitfalls. 

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“One danger is that, for whatever reason, there’ll be delays or companies won’t be able to implement these orders quickly enough,” he said. “The other is a self-fulfilling pessimistic spiral and that the business sector will eventually throw in the towel.”

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Germany’s car industry epitomizes the country’s struggles. Squeezed between Chinese competition and US tariffs, companies from Volkswagen AG to Mercedes-Benz Group AG and major suppliers announced profit warnings and costs reductions last year.  

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Hildegard Mueller, president of auto lobby VDA, emphasized the stakes earlier this month. Urging more trade deals, less bureaucracy and better electric-vehicle infrastructure, she described 2026 as “the year of decision for many, many questions with very long-term consequences.”

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Further economic disappointments could spell trouble for labor. While industrial firms including Robert Bosch GmbH and Siemens AG are cutting thousands of jobs, other employers have added workers, while some firms hoarded staff in hope of better times.

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“The longer the stagnation lasts, the bigger the threat that this will actually tip over into a downturn,” said Sebastian Dullien, head of the IMK research institute, which is close to the labor unions. “That’s why it’s so important that public investments arrive quickly, and that they’re flanked by reforms.”

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Coalition tensions have already flared over an overhaul of pensions, which are stoking labor costs as the population ages. Economists also urge a focus on lowering energy prices, cutting taxes and reducing red tape.

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But Merz and Klingbeil are struggling to bring both their parties and the voters with them, so they have limited authority to push through drastic measures. Three quarters of Germans are dissatisfied with the government’s performance, according to pollster Forsa, and the AfD stands a real chance of winning power for the first time in eastern regions such as Saxony-Anhalt and Mecklenburg-Western Pomerania.

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“Merz and Klingbeil clearly recognize the seriousness of the situation,” said Harald Christ, who leads the committee overseeing the government’s infrastructure fund and is in regular contact with both of them. 

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—With assistance from Sonja Wind.

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