German Chancellor Merz announces sweeping economic reforms including tax cuts, pension and labor changes

German Chancellor Friedrich Merz and his coalition government have unveiled a sweeping 34-measure economic reform package on July 2, 2026, to revitalize Europe's largest economy. The plan introduces 10 billion euros in annual tax relief, gradually raises the retirement age in line with life expectancy, and tightens sick leave rules by requiring doctor certificates from the first day of illness. While some employers welcomed the measures, the package faces criticism from labor unions and the far-right AfD.

Merz economic reform package

• ▪The German parliament is expected to vote on the proposed economic reform package by the end of 2026
• ▪German Chancellor Friedrich Merz and his coalition government presented a comprehensive 34-measure economic reform package on July 2, 2026, to revitalize Germany's sluggish economy
• ▪The German economic reform package includes expanding options for fixed-term employment contracts, allowing longer Sunday opening hours, and banning the nationalization of housing companies

German economic challenges

• ▪Germany's economy returned to modest growth in 2025 after shrinking for two consecutive years, with the government expecting a growth rate of 0.5% in 2026
• ▪Germany faces economic headwinds from high production costs, lagging private investment, costly health and pension systems, Chinese competition, and higher energy costs following Russia's invasion of Ukraine

Tax cuts for families

• ▪The German tax reform keeps the top income tax rate at 42% but raises its threshold to incomes above 70,000 euros, while introducing a tiered rich tax of 45% for incomes over 250,000 euros and 47% for incomes over 280,000 euros
• ▪The German reform package provides approximately 10 billion euros in annual tax relief, giving an average family about 600 euros in annual savings by 2028

Pension system overhaul

• ▪The German pension reform implements recommendations from a government-mandated panel to prevent pension levels from falling and avoid a large, long-term increase in employee pension levies
• ▪The German pension reform will gradually raise the retirement age, currently between 65 and 67 years, in line with life expectancy to stabilize the pension system

Sick leave certification rules

• ▪The new sick leave rules eliminate the practice of allowing employees to call in sick for up to three days without seeing a doctor or obtaining a one-week sick note via telephone
• ▪The German government is tightening sick leave rules by allowing employers to require a doctor's certificate of incapacity for work from the first day of an employee's illness

Political reactions to reforms

• ▪While economists and some employers welcomed the German reform proposals, labor unions criticized aspects such as fixed-term contracts and potential increases to the retirement age
• ▪Alice Weidel, co-leader of the far-right Alternative for Germany party, criticized the reform package as an 'even more left-wing redistribution' and 'minimal compromises.'