Germany Agrees Financial Reforms for States, Grapples with Heatwave, and Addresses AI Investment Gaps

Germany's federal government has agreed new financial reforms to reduce the burden being increasingly carried by the country's 16 federal states, local districts and municipalities.

The agreement was reached by the Conference of State Premiers (Ministerpräsidentenkonferenz) which brings together the heads of the 16 states with representatives of the federal government in Berlin.

"We have begun a new chapter of federal, collegial cooperation in the relationship between the federal government and the states," said Chancellor Friedrich Merz.

In accordance with the agreement, the federal government will cover 80% of additional costs to the regions caused by new federal laws.

At the heart of the matter is a long-standing dispute between the federal government on one side and the states and municipalities on the other.

The issue is that the federal government regularly passes laws that result in increased expenditure or lost revenue for the municipalities — without the latter having any way to object.

Municipalities have therefore called for a rule based on the principle: "He who orders, pays." In other words, the federal government should compensate municipalities for the consequential costs they incur due to federal laws.

Gordon Schnieder, state premier for the southwestern state of Rhineland-Palatinate, said the new agreement was an "important signal" and would save the regions billions of euros once it comes into effect from September 1.

"Next year we will be talking about a relief potential for municipalities of €3 billion and that will grow over the next few years," he said. "I'm grateful that we've demonstrated such unanimity today."

Germany recorded its hottest night in nearly seven years as a prolonged heatwave grips much of Europe.

The German Weather Service said temperatures in Bad Bergzabern, near the French border, did not fall below 26.2 degrees Celsius (nearly 80 degrees Fahrenheit) overnight, matching a record last set in 2019.

Daytime temperatures are continuing to approach 40 C in many regions, while so-called "tropical nights," when temperatures stay above 20 C, are becoming more widespread, especially in southern and western areas.

Authorities say such heatwaves are becoming more frequent and intense due to climate change, with a clear upward trend in the number of days above 30 C.

Temperatures could reach up to 41 C by Friday, with little relief expected before early next week, when severe thunderstorms may develop.

In Dresden, officials have banned water extraction from rivers and lakes until October due to drought and low water levels.

Germany's federal states have agreed to demand that the national government cover most of the costs created by new laws and regulations.

Gordon Schnieder, state premier of Rhineland-Palatinate, said the states want Berlin to take on 80% of expenses arising when federal or EU rules force states to spend more, for example on administration, infrastructure or public services.

The plan includes a threshold: the rule would only apply to measures costing at least €125 million (about $142 million). Below that level, states would continue to bear the costs themselves.

The demand is based on the principle of "who orders, pays," meaning the level of government that introduces new obligations should finance them.

Lower Saxony premier Olaf Lies called the agreement a "breakthrough."

State leaders are due to meet Chancellor Friedrich Merz later in the day, hoping to reach a broader deal on how future policy costs are shared.

Germany has offered support to Venezuela after two major earthquakes left many people dead.

Chancellor Friedrich Merz said Berlin stood ready to assist and expressed sympathy for victims and those who lost their homes.

"The news of the terrible earthquake in Venezuela has left us deeply saddened. Germany stands with Venezuela and will provide assistance," Merz said.

"Our thoughts are with the victims and those who have lost everything they own. I wish the injured strength and a speedy recovery."

Foreign Minister Johann Wadephul also pledged swift help.

“Our hearts go out to all those who have lost loved ones, those injured and those working tirelessly to rescue survivors,” Wadephul said. “Germany stands ready to support the people of Venezuela.”

Defense Minister Boris Pistorius had earlier offered up to six A400M transport aircraft.

Germany risks losing ground in the global artificial intelligence (AI) transformation due to weak investment in software, according to Deutsche Bank.

Chief economist Robin Winkler said Germany invests less than 1% of its economic output in software, far behind leaders like Sweden at about 4%.

He warned that without a significant acceleration, Germany will fall further behind in digitalization, with the shift to AI set to determine future competitiveness.

While Germany’s small and medium-sized businesses remain strong in areas like mechanical engineering, many firms lag in adopting software, especially smaller companies with fewer than 100 employees.

At the same time, Winkler said the gap presents an opportunity, as introducing AI into less digitalized sectors could deliver larger productivity gains than in more advanced economies.

He also downplayed fears of widespread job losses, arguing that labor shortages mean AI is unlikely to drive higher structural unemployment.

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Germany coach Julian Nagelsmann will rotate his squad for the final World Cup group game against Ecuador, but striker Deniz Undav will remain on the bench despite his recent goals.

Undav has scored three times, including a brace in the 2-1 win over Ivory Coast that secured Germany top spot in Group E and a place in the knockout stage.

"I understand the argument that Deniz has earned his place in the starting line-up. Nevertheless, we also have a plan behind our decisions," Nagelsmann said.

He confirmed changes were necessary due to injuries to Nathaniel Brown and Nico Schlotterbeck, with Antonio Rüdiger and David Raum set to return to the starting team.

Nagelsmann will also stick with Manuel Neuer in goal, despite calls for Oliver Baumann to make his World Cup debut.

"It's all about rhythm," he said. "Manu has played two games now."

Nagelsmann said he could understand the case for Baumann but stressed that decisions must be made with the "big picture" in mind.

People who are reconsidering their planned and booked train trip amid the current temperatures are in luck, thanks to an understanding Deutsche Bahn (DB), Germany’s national rail operator.

"Anyone not wishing to take their journey in this extreme weather situation will get their money back," the state-owned company said in a statement.

It even recommended that anybody able to postpone or cancel their trip should do so in the current weather conditions.

All tickets for long-distance trips bought by June 23 are covered by the offer until June 30.

It is the first time DB has offered refunds because of extreme heat.

The extreme heat is also causing problems for the railway system as a whole.

Air conditioning units in trains may give out in very hot conditions as they often used to do. Moreover, points and safety technology can be damaged by the intense sunlight.

There is also a higher risk of fires breaking out along tracks, while the heavy rainstorms that often follow hot periods in Germany can pose problems.

Last summer, heat already caused problems with several points in June and July and led to cancellations and delays, a situation that could easily arise again this year.

Separately, railway services across Germany returned to normal on Wednesday morning after a nationwide failure of the operator's digital communications system. The problem halted rail traffic for about 2 hours and stranded countless passengers.