Germany's Merz bets on spending boost to revive ailing economy

Germany's potential next authorities below conservativist leader Friedrich Merz has said it plans a crack in the arm for the flagging economy with a huge programme of investment in defence and infrastructure.

But economists warn that Europe's largest economy will also need structural reforms for a sustainable recovery after two straight years of recession.

Both Merz's centre-right CDU/CSU and the centre-left SPD, who are in talks on forming a coalition, say that they want to restore industrial competitiveness.

Their draft programme includes lowering taxes on electricity and halving charges for the use of the power grid.

The BDI, Germany's influential industrial lobby, has welcomed the plans and said they would provide much-needed relief for energy-hungry sectors such as steel and chemicals, as well as the small- and medium-sized businesses which form the backbone of the German economy.

All have suffered from the huge increase in costs for heat and electricity in the wake of the Russian invasion of Ukraine.

Taxes on businesses would also be lowered and there is a promise to cut by 25 percent the cost of Germany's often fearsome bureaucracy.

The flagship proposals put forward by the two parties include a big increase in defence spending and a 500-billion-euro package to upgrade the country's creaking infrastructure.

The huge investments over several years could unleash a boom in both defence and construction sectors.

The latter could experience "a bonanza", according to analysts at Stifel investment bank, with production levels returning to where they were before the invasion of Ukraine within three years.

To help the battered automobile industry, the parties want to re-introduce subsidies for the purchases of electric vehicles after similar incentives were abolished two years ago.

In order to combat Germany's acute labour shortage, those who keep working past retirement age will not be taxed on the first 2,000 euros of earnings per month.

The Green party has complained that the government-in-waiting has not included enough action on the climate emergency in its biggest spending plans.

Their dissatisfaction has potential consequences: the Greens' votes will be needed to get the two-thirds majority necessary to approve the plans in the outgoing parliament and so far they have said they will block them.

Claudia Kemfert, economist at the DIW institute, pointed to one harmful policy for the climate in the draft coalition programme: a rise in an tax rebate for those who commute by car.

The FAZ daily said that the big losers from the coalition's plans are "future generations" who will pay for the parties' refusal to raise the retirement age.

The newspaper estimated that "over the next 15 years, the youngest will have to pay 500 billion euros more to finance pensions".

The SPD has also had to swallow tougher conditions for accessing unemployment benefits, which it had made more generous under the outgoing government.

The Handelsblatt newspaper said that the reforms "virtually mean the return of Hartz IV", the controversial reform introduced in the 2000s which also restricted access to welfare benefits.

The CDU/CSU and SPD want to put Germany back on track for potential growth of at least one percent annually, while the economy has been in a prolonged slump.

Currently, the government is predicting 0.3 percent growth for 2025 a meagre figure that would nonetheless be an improvement on the last two years in recession.

As of now, experts are not even sure Germany will be able to escape a third straight year of recession.

According to estimates from the DIW institute for economic analysis, the proposed 500 billion infrastructure stimulus will give a one-percent boost to GDP in 2026 and then more than two percent annually from 2027.

Bundesbank president Joachim Nagel has also warned that extra borrowing alone "will not suffice to alleviate Germany's weak growth".

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This article was generated from an automated news agency feed without modifications to text.

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