The German federal election, set for February 23, 2025, comes at a time of significant international challenges. Following the collapse of the government coalition in November 2024, Germany is preparing for an election that could have substantial implications on global tax and trade policy.
Russia's ongoing conflict with Ukraine and President Trump's threats of a trade war with Europe are creating tension. France, Germany's key ally within Europe, is also experiencing political instability. Meanwhile, the German economy faces internal challenges such as demographic changes in the labor force and energy insecurity.
Tax policy has emerged as a major issue in the German electoral campaign. Parties propose various reforms aimed at boosting economic growth, ranging from income redistribution to increased private sector investment. However, international tax issues like Pillar Two and potential retaliatory measures against EU policies are not widely addressed by candidates.
Germany's role as a major global economy means its next government will influence European tax and trade policies significantly. The EU must decide if its current strategies are beneficial or potentially harmful due to possible retaliatory actions from other nations.
President Trump has already issued executive orders targeting what he perceives as discriminatory international tax practices, indicating potential tariffs against Germany or the EU. The uncertainty surrounding an EU-US tax dispute is compounded by stalled negotiations at the OECD on Pillar One.
German political figures have yet to detail their plans for collaboration with the US amid these tensions. With responsibility for tax and trade policy divided between Brussels and national governments like Berlin, Germany's response will be crucial.
Other major economies like India and China have not implemented Pillar Two legislation yet. If the EU enforces this without negotiation of safe harbors, it may face retaliation from trading partners while European firms deal with high compliance costs.
Domestically, Germany’s position on Pillar Two will affect competitiveness within the EU. The European Commission's "Competitiveness Compass" aims to simplify regulations to boost economic competitiveness compared to the US and China. If Germany finds that Pillar Two hinders competitiveness rather than achieving fairness goals, it might advocate for revisiting these policies.
Germany holds influential positions within key EU institutions such as the European Commission and Parliament. As important decisions regarding tax and trade policies loom over the next two years, particularly concerning Pillar Two and retaliatory tariffs, Germany’s next government must be ready to make difficult choices affecting both domestic interests and broader European strategy.
