Merz’s coalition buckles under pressure to reform Germany

German Chancellor Friedrich Merz stuck with his centre-left coalition partners on Tuesday despite weeks of wrangling over tax, welfare and health reforms that have raised growing questions over the future of his government. As ⁠his first anniversary in office approaches on Wednesday, Merz's approval ratings and support for his conservative Christian Democratic Union (CDU) and the centre-left Social Democrats (SPD) have plummeted amid widespread economic gloom.

After two years of recession, Germany returned to growth at the end of last year but the fragile recovery risks being snuffed out by an energy shock from the war with Iran and new US tariffs targeting carmakers that are already struggling with stifling competition from China, according to Reuters.

"I know the mood in the country is critical, very critical," Merz told a conference in Berlin, adding that the sense of unease was "palpable". But he dismissed growing media speculation ⁠the coalition may fall apart, leading to new elections. "What on earth would come of that?" he said.

"No, we want to and we must succeed with this coalition we now have," he said.

Merz came to power a year ago, pledging to rebuild Germany's depleted armed forces after decades of neglect and overhaul pensions, tax, welfare and health spending to ease growing pressure on public finance. But the long-promised reforms have been held up by disputes between the SPD and CDU over tax levels, spending priorities and welfare, with each side accusing the other of failure to compromise, Reuters reported. Merz, a convinced free marketeer who was fiercely critical of the SPD in previous years, has tempered his attacks on the left since taking office but he repeated calls on his partners to make concessions.

"The Union has made a great many compromises over the past 12 months, and that is precisely why it is now time for greater flexibility and a greater willingness to compromise on the part of the SPD," Merz ⁠said. Opinion polls now put the far-right Alternative for Germany (AfD) party up to five points ahead of the CDU, with the SPD battling the opposition Greens for third place after disastrous results for the party in two state elections this year. According to a survey to be published in the business daily Handelsblatt, 73% of Germans doubt Merz's economic competence, previously an area seen as one of his main strengths, Reuters reported.

"There's no point in trying to get around it: trust in politics has declined," finance minister and SPD leader Lars Klingbeil told reporters. "The dispute, and particularly the heated debate of recent weeks, has also done us harm as a coalition and as a government."

Opposition from within Merz's own party led to a climbdown over pension reforms at the end of last year, as he agreed to appoint a special commission to consider fresh proposals as part of the price for ⁠avoiding a defeat in parliament.

But key issues including retirement age, contribution rates and benefit levels are still undecided.

The statutory health insurance system, facing funding deficits expected to balloon to tens of billions of euros in coming years, must also be agreed as well as long-promised tax reforms to incentivise employment and encourage investment.

The government has pointed to a sharp rise ⁠in defence spending and a steep fall in irregular immigration and asylum approvals over the past year as significant achievements. But the sickly state of the economy and wrangling over reforms have dominated other issues. "Many of our achievements have been overshadowed by too much public controversy and squabbling, particularly in the weeks since Easter," said CDU parliamentary leader Jens Spahn. "We must and want to break free from ⁠it and return to working together within this coalition," he said.