Battered by polls, tariffs and allies, Germany's Merz seeks to regain initiative

By Andreas Rinke and Thomas Escritt

BERLIN (Reuters) -Germany's would-be chancellor, Friedrich Merz, sought to regain the political initiative on Monday, promising renewed focus on competitiveness after a bruising weekend that saw the far-right draw level in a poll with his conservatives for the first time.

His comment, after carping from allies at a seeming willingness to concede too much to his intended Social Democrat (SPD) coalition partners, came in response to alarm at the tariff-induced chaos engulfing financial markets.

Germany's main equity index plunged 10% at Monday's opening in reaction to U.S. President Donald Trump's tariffs, heightening pressure on Merz to form a government, before recovering some ground.

"The situation on the international equity and bond markets is dramatic and threatens to get worse," he told Reuters. "It's more important than ever for Germany to restore its competitiveness. That must be at the heart of coalition talks."

That promise, at the start of a crunch week of negotiation, appeared designed to soothe restive party members and conservative voters, many aghast at what they see as too many potential concessions for the sake of a quick agreement.

Coalition negotiations were interrupted on Monday for consultations between outgoing SPD chancellor Olaf Scholz and the heads of the conservatives and Social Democrats on how to respond to the tariff measures, a source told Reuters.

The source said it was particularly important that Germany work closely with European partners.

Soon after winning the February 23 national election, Merz pushed through a constitutional amendment allowing Germany to take on as much as a trillion euros in new debt with the help of the SPD and the Greens.

Merz had campaigned as an heir to the fiscal rigour that has characterised German governments for decades, and blocked attempts by Scholz's outgoing government to raise more money for infrastructure and the military.

FAR-RIGHT DRAWS LEVEL

A poll on Sunday showed the far-right Alternative for Germany, the election runners-up, drawing level with his conservatives - the first time in the post-war era that a far-right party has topped polls.

Johannes Winkel, leader of Merz's party's own youth wing, said Merz's credibility was at stake.

"We can't carry on as before," Winkel told the Sueddeutsche Zeitung newspaper. "Especially in the key election themes: migration, the economy, cutting red tape. Merz has to pay back that debt."

Both parties want to finalise the coalition agreement this week to allow the SPD time to poll members.

If a coalition deal is not reached, Merz will face a choice between going back on his pledge never to govern with the far-right, forming a minority government that would rely on ad hoc deals in parliament, or calling a new election.        

(Reporting by Thomas Escritt; Editing by Andrew Cawthorne and Kevin Liffey)