Germany's Cost-of-Living Crisis Becomes Political Problem for Merz

A confidential report drawn up for the Bundestag budget committee and seen by Reuters put Germany's Federal Employment Agency (BA) on course for a deficit of more than 8 billion euros this year and cumulative debt of about 23 billion euros by 2030 -- roughly double its earlier 2026 estimate. A weaker labour market is driving the gap: where the BA once expected the jobless count to fall to 2.742 million by 2030, it now projects 2.828 million, and it would have to cover the shortfall with federal loans unless the unemployment-insurance contribution rate rises. Chief executive Andrea Nahles said the hoped-for spring recovery had "not really got going," with unemployment at 6.3 percent in May.

The squeeze is regional as well as national. Eurostat and ECB figures released June 2 showed euro-zone real wages falling for the first time in three years, as May inflation of 3.2 percent outran an expected 2.6 percent rise in negotiated pay -- a decline also recorded in the United States and the United Kingdom. Households were still recovering from the 2022-2023 inflation shock: as of the third quarter of 2025, only half of OECD countries had regained their end-2021 average wage levels, with euro-zone pay still 2 percent below that benchmark.

The cumulative effect showed up in a record poverty rate. The Paritaetischer Wohlfahrtsverband said 16.1 percent of people in Germany -- 13.34 million -- were living in poverty in 2025, a new high, and warned of a "crisis-like situation" while urging the government not to cut social benefits; opposition parties and a CDU social politician criticised the coalition's austerity plans. Friedrich Merz's CDU-SPD government has signalled it wants to lower fuel prices and pursue tax relief, but the strain is feeding political pressure: one late-May poll found 69 percent of Germans expect the AfD to win a state premiership this autumn.