Germany's governing coalition announced on Monday a temporary cut to fuel taxes, reducing the energy levy on petrol and diesel by approximately 17 euro cents per litre for a period of two months. Chancellor Friedrich Merz, speaking after two days of coalition talks held at Villa Borsig in Berlin, said the measure would "very quickly improve the situation for drivers and businesses." The relief package is estimated to cost around 1.6 billion euros in foregone tax revenue.
The backdrop to the announcement is a sharp rise in global oil prices driven by the ongoing conflict between the United States and Iran. Ceasefire negotiations collapsed over the weekend, and the US president subsequently announced a blockade of the Strait of Hormuz — the narrow waterway through which a significant share of the world's oil supplies pass — sending crude prices back above 100 dollars per barrel overnight. The impact has been severe for German consumers: petrol prices rose 17.3 percent year-on-year in March, while diesel surged by nearly 30 percent. Overall, goods and services related to driving cost 6.7 percent more than a year earlier, well above Germany's general inflation rate of 2.7 percent.
Merz made clear that he expects the oil industry to pass the tax reduction directly and fully on to consumers at the pump, a concern reflecting past episodes in which similar cuts were not fully reflected in retail prices. To help offset the lost revenue, the coalition — a partnership between the centre-right CDU/CSU and the centre-left SPD — plans to raise tobacco taxes in 2026. It also welcomed a European Commission announcement that it would examine windfall profit measures against oil companies, similar to the EU's energy crisis levy introduced in 2022.
The fuel tax cut is part of a broader package agreed at the weekend summit. Employers will be permitted to pay workers a tax-free crisis bonus of up to 1,000 euros in 2026. The coalition also indicated it is working toward a tax reform benefiting low- and middle-income earners, set to take effect on 1 January 2027, as well as reforms to the statutory health insurance system — though details on both remain to be finalised.
The measures signal an attempt by the Merz government to project stability after days of reported internal tensions over how to respond to the energy crisis. "This is just the beginning," Merz said, describing the weekend's decisions as the opening of a broader reform agenda aimed at making the German state "more modern and more fair."