Germany Plans For $1.9 billion of Fuel Price Relief Amidst Global Energy Crisis

Germany's coalition government has agreed fuel price relief for consumers and businesses worth 1.6 billion euros ($1.9 billion), ending a dispute over how to respond to an oil price surge triggered by the Iran war.

The energy tax on diesel and petrol will be cut by about 0.17 euros per litre for two months, the conservative CDU party and its centre-left SPD coalition partners said on Monday.

The Iran war has caused the biggest disruption to global energy supplies on record, with plans for a U.S. blockade of Iranian ports and coastal areas further driving up crude prices.

The coalition dispute raised doubts about its ability to act decisively in a crisis, making Monday's deal an important show of political functionality for a government that had appeared at risk of paralysis.

Tensions on Friday over how to tackle soaring fuel prices revived memories of the infighting that plagued the previous government before its collapse in November 2024.

CUSHIONING THE IMPACT

"This war is the real cause of the problems we are experiencing in our own country," Chancellor Friedrich Merz said at a press conference.

He said the coalition was doing everything possible to cushion the impact of the conflict, which has been put on hold by a fragile ceasefire, and urged oil companies to pass the tax cut on in full. "We expect the oil industry to pass along these relief measures directly and fully to consumers," Merz said.

Economists and industry groups were sceptical.

Marcel Fratzscher at economic research institute DIW Berlin said a large share of the tax break could "end up in oil companies' bank accounts" and criticised the measures for failing to encourage fuel-saving.

Germany's filling station operators echoed that concern, calling on the government to impose price controls on oil majors or risk them marking up prices to pocket part of the relief.

"The government needs to be tough on oil majors," a spokesperson told the Rheinische Post newspaper.

The coalition also agreed to let companies pay a 1,000 euro relief bonus per employee, exempt from payroll taxes and social security contributions.

Weekend talks appeared to defuse a dispute that flared on Friday when Economy Minister Katherina Reiche, a Merz ally, criticised proposals from Finance Minister Lars Klingbeil of the SPD to impose a windfall tax on oil companies.

The agreement is an early stress test for Merz's coalition, exposing how quickly divisions between the CDU and SPD can spill into public view amid mounting economic and geopolitical pressure.

A source close to Merz told Reuters that Reiche's remarks undermined a push by the chancellor to resolve coalition disagreements quietly.

The government is under pressure to act as Europe's largest economy struggles with weak growth and disruptions from global trade tensions.

Merz said on Monday that Germany would oppose a planned 2027 tightening of European Union CO2 levies on hybrid vehicles and would argue in Brussels for a more "technology-open" approach, including recognition of cars running on renewable fuels.

The coalition is also preparing broader income tax cuts for lower- and middle-income groups from January 2027.

Further structural reforms will follow, Merz said. "This is only the beginning."

($1 = 0.8556 euros)

(Reuters)