Executive Summary and Assessment

Friedrich Merz, leader of Germany's Christian Democratic Union (CDU) and the front runner in the upcoming Germany’s elections has outlined a series of proposals aimed at reviving Germany’s economy and improving its competitiveness. Merz’s proposals that will impact Volkswagen include reducing energy energy costs by at least five cents per kilowatt-hour, reducing corporate tax to 25% from around 30%, exercising caution when it comes to China investments, adopting a technology-neutral approach to vehicle emissions leading to suspension of EU CO2 targets, being pragmatic when it comes to dealing with Trump, and coming up with stringent migration laws .

Our calculations indicates that reducing the corporate tax rate to 25% could save Volkswagen around €886 million annually based on our 2024 estimate for earnings before taxes (EBT) of €17,714 million. Similarly, we estimate that reducing the electricity cost by €0.05/KWh could save Volkswagen around €105 million annually. However, experts view Merz’s overall policy on taxation as unrealistic, since it will reduce government revenue by around €100 billion. They argue that to offset this revenue headwind, the economy will have to grow by 10%. Similarly, if there will be a coalition between CDU and SPD, there will likely be contentions regarding the tax cuts since Scholz has depicted it as favoring the rich.

Merz wants wants the penalties for failing to meet the CO2 regulations to be abolished. Experts believe that this policy may gain traction in the EU since the European People's Party (EPP), which the CDU belongs, holds significant influence over legislative decisions. Besides, the fight against the automotive CO2 regulation in Europe is gaining traction. Abolishing the CO2 fines will be a big win for Volkswagen which expects an headwind of €1.5 billion euros in 2025 as a result of the CO2 regulation. Similarly, suspending the regulation will be another advantage for Volkswagen since they will be able to focus on combustion engine vehicles, which are in better demand than electric vehicles.

Merz is cautioning companies against investing in China, saying the federal government will not compensate them if they incur losses in the region. China being an important market for Volkswagen makes this policy unfavorable. However, experts believe his policies on China will largely depend on who he forms the government with. They believe that a coalition of the CDU and the CSU+SPD, the most likely scenario, is likely to continue offering a listening ear for companies that have invested in China.

Unlike Scholz, Merz is against subsidizing electric vehicles (EVs). He thinks that this is not sustainable in the long-run. Instead, he wants to support production across industries by improving business conditions such as taxation. However, Knightsbridge Strategic Group (KSG) expects his government to support tax incentives for EVs. The tax model is what CEO Oliver Blume wants as well. Merz is against the EU imposing retaliatory tariffs against US imports. Instead, he wants companies to win Trump’s heart through innovation and good products. Merz wants the EU to be united when dealing with Trump. His pragmatic approach may put him in a better position than Scholz in navigating Trump. Scholz has also emphasized on talks instead of retaliatory tariffs, hence a coalition with SPD is unlikely to impede Merz’s pragmatic approach. A good relationship with US may grant the likes of Volkswagen advantages with regards to Trump’s tariffs as envisioned recently by CEO Oliver Blume.

Merz is seeking a repeal of labor laws, leading to re-entry of people into the labor market. However, he is also calling for stringent immigration rules, which may make Germany a less attractive destination for skilled labor. This could contradict his efforts to reduce labor costs for companies such as Volkswagen.

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Overall, the only feasible and positive policies that will impact Volkswagen are Merz’s stance on the CO2 regulation, pragmatic approach to Trump’s tariff’s and potential tax incentives on EVs. His plan to reduce energy cost by €0.05/KWh and corporate tax to 25% is viewed by experts as unrealistic and is likely to create tensions in the union. Merz’s call for stringent migration laws will also be difficult to pass due to SPD’s stand. Abolishing the CO2 regulation will be a significant tailwind for Volkswagen but benefits from other policies are likely to be minor in the short-run.

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Merz promised to reduce energy costs by 12% compared to 2024 and reduce corporate tax to 25% from an average of 29.9%

• January 2025: In an interview with the World Economic Forum, Merz pointed out that the key to Germany’s competitiveness lies on its manufacturing industry, which accounts for 25% of the GDP. He said that to support the manufacturing industry, the federal government will pay some of the grid costs (min 2:23). He added that every decision they will take, they will first ask themselves if it will be good for the competitiveness of the country (min 4:22). He said that they are opening to bringing more nuclear energy, including fusion (min 7:22).
• January 2025: Merz-led party adopted “Agenda 2030” that promises to reduce energy costs by at least five cents per kilowatt-hour, by lowering grid fees and taxes. This is equivalent to 12% of the 2024 prices. It wants to lower grid fees by raising carbon emissions permit cost and offering incentives for new power grids.
• January 2025: CDU member, Christoph Ahlhaus, who chairs the association of small and medium-sized enterprises, said the plan’s financing remains uncertain and described it as a “weak point”.
• January 2025: According to estimates by BMI, a Fitch Solutions company, the EUR0.05/KWh reduction in energy costs would necessitate taxes and levies to be lowered by 43.6% based on the 2024 price levels, pausing a downside risk for transmission and distribution losses and ques. It points out that taxes and levies currently comprises 28.9% of Germany’s total residential electricity prices.
• December 2024: The CDU has promised to cut corporate tax to a maximum of 25%. Economists estimate that Merz’s proposed tax cuts will be as much as 89 to 99 billion euros and the economic growth won’t be sufficient to offset the lost revenue. For instance, Jens Hogrefe from the Kiel Institute for the World Economy said the federal government will have to shoulder over 50 billion euros in relief alone while municipalities and states will cover the rest. "I therefore consider it extremely unlikely that the states would agree to such plans," said Hogrefe. Economist Jens Südekum, a Professor of International Economics at the Düsseldorf Institute for Competition Economics (DICE**),** pointed out that the tax reduction program would have to lead to a 10% growth in order to finance itself, which is unrealistic.
• February 2025: Scholz depicted Merz’s proposed tax cuts as favoring the rich.

He opposes the ban on combustion engine vehicles

• February 2023: Merz is against the ban on combustion engine vehicles. “We want to achieve the goal of CO2 neutrality in a technology-neutral way - not with bans. Not even with a ban on the combustion engine,” he said. One of his defense against the ban of combustion vehicles lies on the fact that there are already renewable and climate friendly-fuels such as the HV0100 and eFuels (synthetic fuels) that can be used to refuel the existing combustion engines.
• September 2024: He **blamed the problems at Volkswagen on its focus on electromobility**.
• January 2025: He reiterated that Europe must take technologically open approach on combustion engine vehicles.
• January 2025: According to Knightsbridge Strategic Group (KSG), Merz’s government, a coalition of either the CDU+SPD+Greens (the most likely scenario) or CDU+SPD (medium likely scenario) will place a significant emphasis on supporting the automotive sector given its influence on the economy. KSG expects a balanced approach to state support on both combustion engine and electric vehicles. For instance, it expects Merz government to shield German automakers from the EU CO2 fines.