Merz Rolls the Dice on €46B Corporate Tax Breaks for Germany’s Economy

A nation of slackers? Not on Merz's watch. That's the jab Friedrich Merz threw into Germany’s political arena - and he wasn’t joking. As the incoming Chancellor rolls out a bold economic reset, he’s pairing his cultural critique with a whopping €46 billion (Over $50 billion) in corporate tax breaks and a €1 trillion public investment plan that might just redefine Germany’s famously cautious fiscal identity. This isn’t just economic stimulus. It’s a full-throttle attempt to drag Europe’s largest economy out of its longest postwar slump - and take the EU along for the ride. 

Merz’s Make-or-Break Moment

Germany has flirted with recession for the past three years. After shrinking in both 2023 and 2024, the government expects zero GDP growth in 2025. High labor and energy costs, trade tensions with the U.S., and stiff Chinese competition have battered the industrial powerhouse. 

Enter Merz - a business-forward conservative with an unapologetic agenda. His coalition government, alongside Finance Minister Lars Klingbeil, has proposed an ambitious tax package aimed at rekindling private sector confidence. Starting in 2025, companies will be allowed to deduct 30% of new machinery and equipment costs. From 2028, the federal corporate tax rate will drop 1% annually, eventually landing at 10% by 2032, down from today’s 15%. For a country that once enshrined fiscal discipline into its constitution, this shift is seismic. 

What’s in the Fine Print?

The proposal isn’t just about cutting taxes - it’s about reshaping incentives. Key features of the package include: 

• 75% first-year depreciation on electric vehicle purchases by businesses 
• New R&D tax incentives, especially in AI and digital tech 
• Corporate tax cuts phased in over five years 
• Targeted relief for energy-intensive industries like steel and chemicals 
• A new ministry to slash red tape and accelerate digitization of government services 

Meanwhile, Merz has made it clear: this isn’t a free-for-all. Subsidies must drive productivity and competitiveness - not just plug budget holes or appease lobbyists. 

The Ghost of Germany’s “Debt Brake”

Let’s not forget this is the same country that introduced the “debt brake” (Schuldenbremse) in 2009 - and wore it like a badge of honor. But after years of skipping structural reform and underinvesting in its industrial base, Berlin’s finally doing its homework - and this time, the assignment involves €1 trillion in public investment and a fresh push for industrial competitiveness. 

For years, the mantra was “black zero” budgeting, even during the COVID-19 recovery when other economies went into fiscal overdrive. But that narrative's changing fast. Germany’s stagnation has ignited fierce debate about whether the debt brake is an anchor or an outdated relic. Merz’s strategy? Exempt defense spending from borrowing caps and take full advantage of relaxed EU state aid rules (loosened after Russia’s invasion of Ukraine) to subsidize domestic industries under pressure. 

Cheap energy or cheap excuses? Berlin picks a side.

Germany is pushing Brussels for approval to offer discounted electricity to heavy industries like steel, chemicals, and glass in a bid to revive its manufacturing base and boost competitiveness. Economy Minister Katherina Reiche emphasized that industrial resilience is crucial not just for Germany, but for Europe’s broader growth. The government aims to avoid past dependencies, particularly on Russian energy, by focusing on supply chain diversification and strategic independence. This shift signals Berlin’s intent to safeguard its core industries while aligning economic recovery with geopolitical strength. 

U.S. Goes All In, Germany All Ears

Let’s zoom out. Germany’s decline in corporate investment is striking: in Q3 2024, plant, machinery, and vehicle investments were 9% below pre-pandemic levels. By comparison, the U.S. had surged 11.5% above its pre-pandemic baseline. Even in R&D, Germany’s 11% post-COVID rise in intellectual property spending pales against the 36% increase in the U.S. and 27% in France. To know more you can checkout our article on: Is Germany’s Business Model at a Crossroads?

Clearly, Merz is trying to reverse a pattern of underperformance that’s eroded Germany’s role as Europe’s growth engine. Meanwhile, looming threats like Trump’s renewed trade tariffs - 50% on some EU imports - add urgency. With exports already under pressure and domestic costs spiraling, Merz’s plan aims to ensure German businesses stay competitive and anchored at home. 

Is It Enough?

Economists are cautiously optimistic. Holger Schmieding of Berenberg called the plan “good for Germany as a place to invest” but added that deeper regulatory reform is essential. Others see the tax plan as a welcome nudge - not a magic wand. Robin Winkler at Deutsche Bank noted that while the tax breaks may stimulate manufacturing in the short term, long-term success will hinge on execution, innovation, and confidence. These are things tax incentives alone can’t guarantee. 

There’s also political risk: the European Commission could still challenge state aid components of the plan. And inside Germany, critics argue that removing debt limits sets a dangerous precedent - one that might backfire if inflation or debt servicing costs spike. But one thing is certain: Merz is betting on growth. He’s betting that revitalized factories, faster internet, stronger exports, and a digitized government will generate enough momentum to keep the economy rolling into the next decade. 

Europe’s Crown Is on the Table

Germany’s growth engine isn’t broken — but Merz knows it needs a serious tune-up. His €46 billion tax gamble is more than just a stimulus package. It’s a message to German businesses, EU regulators, and global investors: Germany is still open for business - and ready to compete. Whether it’s enough to revive growth and reclaim Europe’s economic crown remains to be seen. But for now, the strategy is clear, the stakes are high - and the era of fiscal abstinence is officially over.