Germany's coalition government has agreed on what economists are calling one of the country's largest reform packages in decades, covering tax relief, labour market rules, pensions, and corporate red tape. Chancellor Friedrich Merz, whose centre-right CDU/CSU bloc governs alongside the centre-left SPD, presented the 34-point plan at a press conference in Berlin, describing it as a necessary step to restore growth to Europe's largest economy. "We are under pressure from many sides," Merz acknowledged, citing rising energy and labour costs, fierce Chinese competition, and the turbulence caused by US tariff policies.
The most contentious element of the package is a sharp tightening of sick leave rules. Under current German law, employees are required to obtain a doctor's certificate only from the fourth day of illness onwards, and since the Covid-19 pandemic a telephone consultation has sufficed for short absences. Under the new rules, workers will need to visit a doctor in person from the very first day they are ill, and telephone sick notes will be abolished entirely. Merz has repeatedly complained about what he calls an "exorbitantly" high rate of absenteeism, arguing Germany cannot afford the competitive disadvantage. However, health insurers' own data suggest telephone sick notes account for only around one percent of all absences, and Germany's general practitioners' association has warned the change will be "catastrophic", flooding waiting rooms with patients who are infectious or physically unwell and have no genuine need for in-person examination. The new rules are expected to take effect in 2027, and collective bargaining agreements may allow individual employers to set different thresholds.
On taxes, the package promises income tax cuts worth €10 billion a year, targeted at low and middle earners — a typical family with two children and a combined income of €60,000 stands to gain around €600 annually. To finance the relief, the top rate of income tax will be restructured: a 45 percent rate will apply from €250,000 of taxable income, rising to 47 percent above €280,000. Finance Minister Lars Klingbeil of the SPD called the redistribution "fair". The package also extends the maximum duration of fixed-term employment contracts from two to four years, with up to six renewals permitted — a measure business groups welcomed but the trade union Verdi condemned as shifting entrepreneurial risk onto workers. The industrial union IG Metall called the labour reforms broadly "an attack on workers' rights".
The government is also promising to reduce corporate reporting burdens to EU minimum standards and to push for tougher European action against what it describes as unfair Chinese competition, as well as stricter rules on foreign investment in strategic sectors. A comprehensive pension reform, including an eventual rise in the retirement age beyond 67, is to be legislated by year's end.
The political backdrop is impossible to ignore. Merz's coalition has struggled for months to agree on shared priorities while the far-right Alternative for Germany (AfD) has led national opinion polls. Key regional elections are due in September in the states of eastern Germany — the former communist east — where an AfD-led state government would be unprecedented in post-war German history. Senior economist Marion Muehlberger of Deutsche Bank called the package one of Germany's biggest structural reform efforts in decades, while Berenberg analyst Holger Schmieding noted that no single measure would be transformative on its own, but together they could make Germany a more attractive place to invest. Marcel Fratzscher of the DIW economic institute was more sceptical, describing the package as largely symbolic. CSU leader Markus Söder put it plainly: "This is not the big bang, but a next step out of the crisis."