Germany set to unveil coalition in eye of Trump tariff storm

(Reuters) - German conservatives under Friedrich Merz were poised to unveil a coalition deal with the centre-left Social Democrats (SPD) on Wednesday, aiming to revive growth in Europe's largest economy just as a global trade war threatens recession.

People familiar with the negotiations expected an agreement by midday (1000 GMT) after chancellor-in-waiting Merz and SPD leader Lars Klingbeil meet in the morning to iron out the last remaining differences.

Pressure to reach a deal has taken on new urgency as the government will take charge at a time of global turbulence in an escalating trade conflict sparked by U.S. President Donald Trump's sweeping import tariffs.

"A possible trade conflict increases the risk of recession, there is no question about that," the outgoing Finance Minister Joerg Kukies of the SPD told Deutschlandfunk radio.

"It increases the pressure to act, because Germany needs a government that is capable of taking action," he said.

Kukies said the potential coalition partners had already agreed to support a free trade zone between the European Union and the United States, while being open to further cross-border trade deals.

Merz, the leader of the CDU-CSU conservative bloc, also told Reuters this week that the tariff-induced chaos on global financial markets made it all the more important to form a government quickly.

"Certainly," said senior CDU lawmaker Thorsten Frei, when asked whether a deal would finalised on Wednesday.

AFD TOPS POLL

Merz and Klingbeil have internally scheduled a press conference in the afternoon, contingent on reaching a final pact, sources said.

Merz, who called Trump's U.S. an unreliable ally after winning the election in February, has already vowed to build up defence spending as Europe faces a hostile Russia, and to support businesses struggling with high costs and weak demand.

German economic institutes have cut back their forecast for this year's growth to 0.1% from the 0.8% they had expected in September, sources told Reuters on Tuesday. Germany has endured two years of contraction already and the tariffs are a sharp blow to its highly export-focused economy.

As Trump's tariffs on dozens of countries kicked in on Wednesday, European shares plunged, with Germany's DAX .GDAXI down more than 2%.

Merz's coalition would be the only possible two-party majority that excludes the far-right Alternative for Germany (AfD), whose support has surged on a nativist, anti-migration agenda and came second in the February election.

In a blow to Merz, a new survey by Ipsos released on Wednesday showed the AfD topping the polls for the first time with 25%, overtaking Merz's conservatives who slipped to 24%.

It follows another poll by the Forsa institute, which showed 60% of respondents said Merz was not fit to be chancellor, including 28% of CDU/CSU voters.

After winning the election, Merz pushed measures through parliament to allow him to unleash a borrowing bonanza to fund a big boost in defence and infrastructure spending and support struggling German companies.

But the move, while providing his new government with a massive windfall, received criticism including from some of his own supporters for pivoting away from a promise of fiscal rigour.

The last remaining issues that the SPD and the CDU/CSU bloc have yet to agree on include the distribution of ministries, the sources said.

The coalition deal must still be ratified by a vote of the SPD's membership.

If the SPD membership backs the deal, the chancellorship would return to conservatives after the three-year interregnum of the SPD's Olaf Scholz, whose tenure was marked by the economic and political fallout following Russia's full-scale invasion of Ukraine in 2022.

But Merz cuts a very different figure from Angela Merkel, the centrist conservative who ran Germany for 16 years before Scholz.

Blaming her centrism and liberal immigration policies for the AfD's growing strength, Merz has promised that a hard line on deporting those illegally resident in the country and efficient government will turn the tide.

(Writing by Ludwig Burger, Rachel More and Matthias Williams; Editing by Hugh Lawson and Toby Chopra)