German Chancellor Friedrich Merz has acknowledged that Germany’s economy remains under severe pressure, warning that earlier policy measures have not been sufficient to restore competitiveness and growth. In a letter sent at the start of the year to members of his governing coalition, Merz described the current economic outlook as “very critical in some areas” and said that reviving growth would be the government’s foremost priority in 2026.

According to the letter, cited by German news agency dpa, Merz stressed that only decisive political and legislative action could meaningfully improve conditions for businesses and put Europe’s largest economy back on a sustainable growth path. He emphasised that Germany must focus on structural reforms, regulatory relief, and investment-friendly policies if it is to regain momentum after years of economic stagnation.

Germany’s economy contracted in both 2023 and 2024, reflecting a combination of domestic and external pressures. Winter forecasts released in December 2025 by leading German economic institutes projected growth of just 0.1 per cent for 2025. Economists pointed to weakening global demand, high energy costs, and a sharp decline in exports, including reduced shipments to the United States, as key factors weighing on performance.

Analysts have also highlighted long-standing structural challenges, including slow reform processes, bureaucratic hurdles, and lagging investment in digitalisation and advanced technologies. These problems were compounded in 2025 by higher U.S. tariffs, which further strained Germany’s export-oriented industries and added uncertainty for manufacturers.

Since taking office in May 2025, Merz has pledged to revive Germany’s economy through increased public spending, expanded infrastructure investment, and higher defence outlays. His government has introduced tax cuts and other measures aimed at stimulating growth, though business groups and industry associations have warned that the pace of reform remains too slow to address the scale of the challenge.

In his New Year’s address, Merz placed Germany’s economic difficulties within a broader geopolitical context, describing the current global environment as an “epochal shift.” He pointed to rising protectionism, geopolitical instability, and changing transatlantic dynamics as forces reshaping Europe’s strategic and economic landscape.

“Our partnership with the United States of America, which has long been the reliable guarantor of our security, is changing,” Merz said. “For us Europeans, this means that we must defend and assert our interests much more strongly by ourselves.”

On security and defence, the Chancellor argued that Germany must significantly improve its deterrence and defence capabilities to safeguard long-term peace. He linked security resilience with economic strength, noting that sustained investment and innovation are essential for both national defence and competitiveness.

Merz reiterated that his government, formed after the federal elections in February 2025, is committed to cutting red tape, accelerating technological innovation, and creating a more attractive environment for investment. He rejected the notion that Germany is merely a victim of global forces, saying that domestic policy choices will be decisive in shaping the country’s future.

“We are not the victims of extraneous circumstances. We are not at the mercy of great powers,” Merz said, adding that 2026 could be a turning point. “It can be a year in which Germany and Europe, with new strength, reconnect with decades of peace, freedom, and prosperity.”