Merz secures German coalition deal as Trump tariffs threaten recession

German conservatives under Friedrich Merz announced a coalition deal with the center-left Social Democrats (SPD) on Wednesday, aiming to revive growth in Europe's largest economy just as a global trade war threatens recession.

The deal caps weeks of haggling between chancellor-in-waiting Merz and the SPD after he topped elections in February but fell well short of a majority, with the far-right Alternative for Germany (AfD) surging into second place.

Pressure to reach a deal has taken on new urgency as the government will take charge at a time of global turbulence in an escalating trade conflict sparked by U.S. President Donald Trump's sweeping import tariffs.

Merz, who called Trump's U.S. an unreliable ally, has already vowed to build up defense spending as Europe faces a hostile Russia, and to support businesses struggling with high costs and weak demand.

He has also pledged to get tougher on migration, moving Germany away from a more liberal immigration policy under his conservative predecessor Angela Merkel during the 2015 European migrant crisis.

The coalition deal must still be ratified by a vote of the SPD's membership.

If they back the deal, the chancellorship would return to conservatives after the three-year interregnum of the SPD's Olaf Scholz, whose tenure was marked by the economic and political fallout of Russia's conflict with Ukraine.

As details of the coalition deal began to leak out, a source said Germany will lower corporate tax from 2028 and reform welfare payments.

AfD tops poll

German economic institutes have cut back their forecast for this year's growth to 0.1 percent from the 0.8 percent they had expected in September, sources told Reuters on Tuesday. Germany has endured two years of contraction already and the tariffs are a sharp blow to its highly export-focused economy.

Merz said this week that the tariff-induced chaos on global financial markets made it all the more important to form a government quickly, a sentiment echoed by the outgoing Finance Minister Joerg Kukies of the SPD.

"A possible trade conflict increases the risk of recession, there is no question about that," Kukies told Deutschlandfunk radio.

He said the coalition partners had already agreed to support a free trade zone between the European Union and the United States, while being open to further cross-border trade deals.

The coalition is the only possible two-party majority that excludes the AfD, whose support has surged on a nativist, anti-migration agenda.

In a blow to Merz, a survey by Ipsos released on Wednesday showed the AfD topping the polls for the first time with 25 percent, overtaking Merz's conservatives who slipped to 24 percent.

It follows another poll by the Forsa institute, which showed 60 percent of respondents said Merz was not fit to be chancellor, including 28 percent of CDU/CSU voters.

After winning the election, Merz pushed measures through parliament to allow him to unleash a borrowing bonanza to fund a big boost in defense and infrastructure spending and support struggling German companies.

But the move, while providing his new government with a massive windfall, received criticism including from some of his own supporters for pivoting away from a promise of fiscal rigor.

Merz cuts a very different figure from Merkel, a consensual conservative who ran Germany for 16 years before Scholz.

Blaming her centrism and liberal immigration policies for the AfD's growing strength, Merz has promised that a hard line on deporting those illegally resident in the country and efficient government will turn the tide.