The New German Government – Old Wine in New Bottles or a Real Fresh Start?

On May 6, 2025, the German Bundestag elected Friedrich Merz Chancellor. He now leads a two-party coalition government which promised the German voters/population a fresh start and new policy for the country. But how do the political goals set out in the coalition agreement differ from those of the previous “traffic light coalition,” and what do they imply for foreign companies operating in Germany?

One of the most extensive measures is an amendment to the German constitution (“Grundgesetz”), which enables the federal government to set up a special fund in the amount of up to EUR 500 billion with own credit authority. This special fund is intended for additional investments in infrastructure and for financing further measures to advance the achievement of climate neutrality by 2045.

In addition, by establishing a Ministry for Digitalization and State Modernization, the government aims to accelerate Germany’s transformation to a modern, efficient, and digitally capable state.

Moreover, Chancellor Friedrich Merz announced in his first government statement on May 14, 2025, that the so-called “investment boosters”, degressive depreciation allowances of 30% per year for investments in new machinery, equipment, or digitalization, will provide the industry with an incentive for investments. Together with the reduction of the corporate tax rate to 10% by 2032 by gradually reducing the current rate by 1 % annually starting 2028, the new government aims to create “reliable investment conditions that will make Germany attractive again in international comparison”. Regarding energy-intensive industries, the announced reductions in electricity taxes and grid fees serve the same purpose.

The new government also plans comprehensive reforms to labor law. In terms of working hours, instead of the currently applicable maximum daily working hours, a maximum weekly working time averaging 48 hours including overtime shall be introduced in accordance with EU law. Accordingly, up to 12 hours and 15 minutes working time per day would be allowed. These plans have already been publicly debated; initial consultations are underway in the German parliament (“Bundestag”), and expert hearings have taken place. In addition, intended tax incentives shall make overtime work more attractive.

The planned reform of the fixed-term employment law, providing for the abolition of the written form requirement, the exemption of employment relationships for students from the prohibition of subsequent employment, and for easier return possibilities for pensioners to their previous employer will also bring more flexibility to the labor market.

The new federal government`s activities and plans clearly demonstrate that Germany strives to regain its international attractiveness as a business location. The combination of massive infrastructure and climate investments, tax incentives, a push for digitalization, and greater flexibility in labor law is intended to send a strong signal to foreign investors. Whereas the amendment of the constitution for the EUR 500 billion investment package has already been approved by Parliament, the other measures are still in the legislative process. The Social Democrats (“SPD”), the (smaller) coalition partner, recently criticized that some measures benefited the industry unilaterally and consumers too little. It therefore remains to be seen whether Chancellor Merz will be able to implement all measures as planned. However, even if only some and not all plans are put into practice, those who invest in Germany will face more reliable framework conditions, more efficient administrative processes, and more competitive location costs in the future. We can therefore hope that the innovations will create new opportunities and possibilities for international investors in a modernized market focused on long-term growth. And this, in return, would bring the long-awaited fresh start for the German economy.