German conservatives under Friedrich Merz agreed 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.

The deal caps weeks of haggling between chancellor-in-waiting Merz and the SPD after he topped elections in February but fell well short of a majority, with the far-right Alternative for Germany surging into second place.

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 US President Donald Trump’s sweeping import tariffs.

The agreement “is a very strong and clear signal to the citizens of our country. And it is also a clear signal to our partners in the European Union,” said Merz during a news conference with his coalition partners.

“Germany is getting a government that is capable of action and strong,” said Merz.

Outlining a raft of policies, the coalition agreed to cut taxes for middle and lower incomes, to cut corporate tax, lower energy prices, support the electric car industry and scrap a controversial supply chain law.

It also planned a commission on further reforming Germany’s constitutionally enshrined spending limits known as the ‘debt brake’, which has long been seen by critics as hobbling growth.

With the AfD breathing down its neck, the coalition also signalled a tougher stance on migration, planning to turn away asylum seekers at Germany's borders and scrap fast-tracked naturalisation, among other measures.

It also announced a voluntary military service and the creation of a national security council, as well as moves to speed up defence procurement.

The 69-year-old Merz, who called Trump’s US an unreliable ally, 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.

The tougher stance on migration moves Germany away from a more liberal policy under his conservative predecessor Angela Merkel during the 2015 European migrant crisis.

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

If they back 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 of Russia’s full-scale invasion of Ukraine in 2022.

The CDU was set to take charge of economy and foreign ministries as well as the chancellery, while the SPD would take charge of finance and defence, according to a document seen by Reuters.

That puts SPD leader Lars Klingbeil in the frame to become finance minister and likely leaves popular Defence Minister Boris Pistorius in place.

German economic institutes have cut back their forecast for this year’s growth to 0.1 percent from the 0.8 percent 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.

Merz told Reuters this week that the tariff-induced chaos on global financial markets made it all the more important to form a government quickly, a sentiment echoed by the outgoing Finance Minister Joerg Kukies of the SPD.

“A possible trade conflict increases the risk of recession, there is no question about that,” Kukies told Deutschlandfunk radio.

The coalition is the only possible two-party majority that excludes the AFD whose support has surged on a nativist, anti-migration agenda.

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

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.