Germany bets on tax breaks to lift economy

Germany's new government is hoping a major package of corporate tax breaks set to be passed this summer will lift Europe's largest economy out of its current malaise.

Figures published by the German Chamber of Commerce and Industry at the end of May suggest the country's economy is expected to contract by 0.3 percent this year, which would be the first time since World War II that Germany has experienced three consecutive years of economic contraction, hence the need for stimulation.

The Financial Times reports that Finance Minister Lars Klingbeil, a Social Democrat member of the country's conservative-dominated coalition government, will present the proposals to the Cabinet on Wednesday. It is estimated that the measures, which will include deductions on items including electric vehicles, could cost up to 46 billion euros ($52.3 billion) by 2029.

The proposals will be key to newly-appointed Chancellor Friedrich Merz's efforts to make a fresh start under his reign.

Merz's Christian Democratic Union-Christian Social Union alliance, known as the CDU-CSU, emerged as the largest party in the country's parliament at a federal election in February, with Merz the chancellor-in-waiting until his appointment was confirmed by a parliamentary vote.

But unexpectedly, he took two rounds of voting to be confirmed, which some pundits said has weakened his authority from the outset, making the introduction of the new measures all the more important.

"His promise to run a much more efficient and conflict-free government ... looks much less credible now," Franziska Palmas, senior Europe economist at Capital Economics, told the Euronews website. "Delivering on his economic proposals, including a big increase in defense and infrastructure spending, corporate tax cuts, bureaucracy cuts and digitalization, will be more difficult than expected."

The draft bill introducing the new measures says "following a period of economic stagnation, it is important to raise the potential of the German economy significantly", and adds that it was intended to "send a strong signal for the short-term and long-term competitiveness of Germany as a business location". Klingbeil followed this up by saying it was a statement of intent from the government.

"After just four weeks in office, we are presenting the first important reforms to ensure new economic strength," he explained. "We are providing the economy with urgently needed planning certainty and creating strong investment incentives."

His comments came the day before Merz travels to Washington to meet United States President Donald Trump, against a backdrop of ongoing economic turmoil caused by the US government's tariff program.

Deutsche Bank economist Robin Winkler told Reuters the new measures will help, but raised doubts over their longer-term impact.

"This new depreciation rule provides a welcome short-term stimulus for the manufacturing sector," he said. "However, its impact on facilitating the broader structural transformation of the German economy is likely to be limited."

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