Germany: Political Outlook 2026

A Coalition Under Pressure to Deliver 

Entering 2026, Germany’s federal coalition has settled into a working rhythm marked by internally cohesive decision-making through the coalition committee. This body increasingly functions as the primary engine of policy resolution, buffering tensions and limiting public conflict. While public debate before and after those committees is crucial for the success of policy initiatives, once there has been an agreement, Germany switches into implementation. This stands in contrast to the prior legislative period, where visible disputes often undermined government credibility. The coalition’s operational focus has shifted from negotiation over identity to delivery of outcomes, driven by heightened expectations from voters, business stakeholders, and international partners.

State level elections in Saxony-Anhalt and other states in September are shaping up as crucial inflection points. These regional contests increase political incentives within the coalition to maintain unity on contentious bills, particularly on fiscal and social reforms that shape everyday economic life. Weak performance at the state level could feed narratives exploited by opposition parties and populist formations—undermining federal cohesion. Thus the window for reform decision-making is between now and September 2026. 

Economic Backdrop: Stabilization, Not Yet Momentum 

Germany enters 2026 after narrowly exiting recession. GDP grew by around 0.2% in 2025, with forecasts for 2026 ranging between 0.5% and 1.0%, depending on external demand and domestic investment. Inflation is easing toward the 2% range, while unemployment remains elevated at just over 6%. The overall picture is one of stabilization rather than strong recovery.

This economic environment directly shapes the political agenda. Weak growth has narrowed policy options and increased the urgency of structural reform. Incremental adjustments are no longer politically or fiscally sufficient, and the coalition faces rising expectations from business, voters, and international partners to address long-standing structural constraints.

This especially is true as Chancellor Merz has been involved heavily at the European and geopolitical stage trying to hold together NATO, while making early steps for different European paces—such as through an even closer coordination with France and the UK. Nonetheless, 2026 is the year where the chancellor needs to look inwards and solve inner policy issues. 

2026 as the Year of Structural Reform: Key Legislation in the Pipeline

Several politically sensitive reform tracks converge in 2026, with concrete legislative initiatives either advancing or in preparation:

• Pensions: Following the Rentenpaket 2025, further proposals from the government-mandated Alterssicherungskommission are expected. These are likely to focus on long-term financing, demographic sustainability, and incentives for longer workforce participation.
• Healthcare and Long-Term Care: Draft legislation to stabilize statutory health insurance (GKV-Stabilisierungsgesetz) and a broader Pflegereformgesetz are moving through preparatory stages, driven by rising costs, labor shortages, and demographic pressure. The German pharma industry is also working in a renewed Pharma Dialogue with the German government on updating the German price negotiation systems (AMNOG), especially as Trump’s Most-Favored-Nations approach puts further pressure on the German drug manufacturing and research environment.
• Tax Policy: Inheritance tax reform remains contentious, particularly regarding exemptions for large estates and family businesses. Targeted corporate tax adjustments and measures to reduce “cold progression” are part of the broader fiscal debate on competitiveness and investment incentives. The key issues will be whether a reduction in corporate tax will come sooner than planned in the coalition treaty.
• Energy and Climate Frameworks: Legislative initiatives to accelerate renewable deployment, streamline permitting, and modernize grids are advancing, alongside regulatory frameworks for hydrogen infrastructure, storage, and cross-border energy integration. Germany’s hunger for rare earths needs to be addressed in line with striving for more autonomy.
• Infrastructure Acceleration: Measures to shorten planning and approval timelines for transport, digital, and energy infrastructure projects are politically central, responding to persistent criticism of slow implementation. As the German extra budget of 500 Mio has already earmarked a majority of its spending to infrastructure projects, investors need to look at where there is still room for gaps and find political support for changes in plans.
• Defense spending: Germany has understood the push back from the US in the defense sector and has already shifted gears in defense spending. The growing defense ecosystem is also an economic stimulus, but it needs to be seen whether this can be upheld over the next decade. Typical German values such as ingenuity matter again and are now coupled with an open investment environment in new defense technologies. 

What This Means for Business 

Germany is in a phase of transition rather than decline. Political incentives increasingly align with economic reform, and coalition cohesion improves the likelihood of implementation. If investment continues to flow and energy costs trend downward, structural reforms in social systems, taxation, and infrastructure can begin to address long-standing weaknesses.

For companies, 2026 is a year to engage early. Regulatory frameworks are being shaped now, and policy outcomes will define cost structures, investment conditions, and competitiveness for the next decade. If companies want to be part of the German economic model, they need to lean in now. 

Materials presented by Edelman’s public & government affairs experts. For additional information, reach out to PublicGovtAffairs-Germany@edelman.com.