Volkswacht Bodensee - Germany unveils 1.6 bn euro fuel price relief to tackle energy shock

The announcement came after oil prices surged again following the collapse of US-Iran peace talks and US President Donald Trump's decision to blockade the Strait of Hormuz.

Chancellor Friedrich Merz said the war "is the root cause of the problems we face in our own country", and stressed Berlin was doing all it could to try to bring the conflict to an end.

Following talks between his CDU party and its coalition partners, Merz said his government had decided to cut the tax on petrol and diesel by around 17 euro cents ($0.19) for two months.

"This will very quickly improve the situation for drivers and businesses in the country, and above all for those who, mainly for professional reasons, spend a great deal of time on the road," he told a news conference in Berlin.

Fuel prices in Germany, like elsewhere, have jumped sharply since the outbreak of the US-Israeli war against Iran at the end of February.

The relief measures would cost the government around 1.6 billion euros, which is to be financed by higher taxes on tobacco, a finance ministry spokesman said.

Employers will also be able to pay their staff tax-free bonuses of up to 1,000 euros ($1,170) to mitigate the impacts of inflation, which has already started rising in Germany, the government announced.

- Calls for 'targeted relief' -

Merz warned, however: "At the same time, we cannot offset every single outcome on the market with government funds... The state cannot absorb all uncertainties, not all risks, not all disruptions in global politics."

The relief measures quickly drew criticism however, with the DIW economic institute warning that much of the fuel tax cut may not be passed on to consumers, and that more needy groups, such as pensioners, would not benefit from the tax-free bonus.

"The package of measures shows a clear social imbalance," said DIW president Marcel Fratzscher, calling for "more targeted relief" for lower income households.

Germany, Europe's biggest economy, has been hard hit by the surge in energy costs at a time when many of its power-hungry manufacturers were already facing headwinds from US tariffs and fierce Chinese competition.

Merz warned the war's effects were likely to be long-lasting. "The German economy will face a significant burden over an extended period," he said.

Leading economic institutes this month slashed their growth forecast for Germany to just 0.6 percent for 2026, down from a pre-war prediction of 1.3 percent.

F.Fehr--VB