Germany’s Reform Package Announced by Chancellor Merz

On Thursday, German Chancellor Friedrich Merz revealed a comprehensive reform initiative focusing on pensions, taxes, and labor laws, with the goal of revitalizing Germany’s economy and setting the nation “back on its feet.”

Merz indicated that the 34-point reform plan emerged after extensive discussions between the ruling CDU/CSU and SPD parties. He mentioned, “We are modernizing our country and leading it into the future,” at the conclusion of their meeting.

One key aspect of the reform is a plan to reduce taxes for low- and middle-income households by about 600 euros annually, which totals around 10 billion euros. The update to the tax system will maintain the top income tax rate at 42%, but it will only apply to incomes exceeding 70,000 euros. The government plans to implement these tax changes starting January 1, 2027.

As for the pension system, the proposal includes gradually raising the retirement age from 65 to 67. It also incorporates various expert recommendations to ensure the sustainability of the pension system. The German Labor Minister characterized this pension policy as a “masterpiece,” while Chancellor Merz referred to it as “the second major reform after the health insurance reform.”

The government is aiming to pass these pension reforms through the Bundestag by the end of 2026.

Additionally, the proposed labor reforms would limit sick leave days and revoke the acceptance of phone-in sick notes, requiring medical certificates from the first day of absence. Merz has previously voiced concerns over high sick leave rates in Germany, stating, “We know this is a difficult decision, but we can no longer accept the competitive disadvantage of absenteeism.”

The ruling coalition also seeks to adjust “fixed-term contracts that lack objective justification.” Other changes include extending Sunday business hours, providing more avenues for fixed-term employment, and prohibiting the nationalization of housing companies to alleviate investor uncertainty.

This announcement comes as Merz and his coalition are grappling with notably low approval ratings. A recent study revealed that only 12% of participants were satisfied with the government’s performance, and 13% viewed the economic situation positively, marking a 7% drop since January.

The survey also suggested that 38% of respondents anticipate the economy will worsen in the next year, with this figure rising to “nearly one in two” in eastern Germany. Interestingly, the populist Alternative for Germany (AfD) party, led by Alice Weidel, is reportedly ahead in national opinion polls.

Weidel took to social media to critique the reform plans, framing them as “another broken CDU election promise” and labeling them as further leftist redistribution rather than substantive reform. She added, “The fact that this is being touted as a ‘breakthrough’ shows only one thing: this government is completely incapable of reform.”

Regional elections are on the horizon in Germany, scheduled for September in areas like Saxony-Anhalt, Berlin, and Mecklenburg-West Pomerania, where polls indicate that the AfD leads in Saxony-Anhalt and Mecklenburg-West Pomerania.