Coalition faces strain prior to 'autumn of reforms' on 24th August, 2025, at 16:07
In the heart of Europe, Germany's new black-red coalition government, led by Chancellor Olaf Scholz, is facing significant economic hurdles. The coalition, comprising the Social Democratic Party (SPD), the Christian Democratic Union (CDU), and the Christian Social Union (CSU), has been in office since early May.
Finance Minister and SPD leader, Robert Habeck's counterpart, Friedrich Merz, from the CDU, has expressed dissatisfaction with the current achievements and called for comprehensive social reforms to secure the financial stability of the Social State. Merz advocates for reforms that strengthen self-responsibility, allow for tough decisions, and promote growth and employment, without unduly burdening small and medium-sized enterprises.
In a similar vein, SPD leader and Finance Minister, Habeck, has advocated for top earners to contribute more to make society fairer. He has called for structural reforms in health, care, citizens' income, and pensions, suggesting creativity from all parties beyond wage cuts for workers. Habeck remains open to hearing ideas from CSU leader Markus Söder and Union faction leader Jens Spahn on closing the 30 billion euro budget gap.
The Social State Commission, established by Federal Minister Barbara Bas (SPD), is expected to submit its results by the end of 2025, as per the coalition agreement. The commission aims to propose reforms for social benefits like citizen's income, housing benefit, and child supplement.
The CDU's Minister of Economics, Katherina Reiche, has initiated a debate about a longer working life. This proposal comes as significant increases in social system costs are expected in the coming years, causing concerns about labor costs.
Conflicts within the coalition have arisen, including over the appointment of new judges for the Federal Constitutional Court and the decision not to reduce the electricity tax for everyone. CDU General Secretary Linnemann has compared the current situation to the Agenda 2010 when Chancellor Gerhard Schröder (SPD) implemented far-reaching reforms in labor market and social policy.
Merz has emphasized the need for a realignment of social policy and reaffirmed that the current social state is not financially sustainable. He has also called for improved coalition communication and urged both parties to talk with each other, not over each other.
In a separate development, the SPD is considering changes to the inheritance tax, which offers many opportunities for design that often lead to a very low tax burden. However, Habeck remains steadfast in his policies despite criticism from the Union.
Linnemann has also noted that the country is facing similar financial challenges as it did 20 years ago, stating that the social state is no longer financially sustainable. Merz has wished for an SPD that continues the common path "critically of migration and friendly to industry."
As Germany navigates these economic challenges, the black-red coalition will need to find a balance between social justice, economic growth, and fiscal responsibility. The future of the Social State hangs in the balance, and the decisions made in the coming months and years will have lasting implications for the German people.
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