Can Germany’s ambitious reform package revive its economy?
Germany’s fragile coalition government has announced a major package of economic reforms aimed at kick-starting the country’s chronic low growth. The long-awaited measures, announced earlier this month by chancellor Friedrich Merz, include tax cuts, greater labour-market flexibility and a broad easing of bureaucratic red tape – and follow separate but related pension reforms, announced a week earlier.
Assuming the measures clear the Bundestag (very likely, but not certain), no one expects them dramatically to boost Germany’s immediate fortunes. But they are definitely a positive first step that should “lift business sentiment”, says Simon Nixon on Substack. Moreover, they “could hardly have come at a more crucial moment, given the mounting evidence that the German economy is being eaten alive by Chinese competition”.
Why is China a threat to Germany’s economy?
The news that Volkswagen is weighing plans to cut 100,000 jobs – more than double the number agreed with the unions – and close four factories in Germany is the latest blow to hit the country’s vehicle sector, which has been ravaged by cheap Chinese competition and innovation in electric vehicles, as well as Donald Trump‘s tariffs.
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Similarly grim dynamics are playing out in other export-oriented industries, such as chemicals and aircraft manufacturing. Meanwhile, “panic” is spreading through the Mittelstand, the vast network of midsized, family-owned companies that form the backbone of the German economy, says Tom Fairless in The Wall Street Journal. German industry is currently shedding more than 10,000 jobs a month and industrial output fell by roughly 10% between February 2022 and early 2026, with energy-intensive sectors plunging by more than 15%.
Is Germany’s economy growing?
Barely, and at a far slower rate than that of peers. Adjusted for inflation, GDP is only fractionally higher (0.8%) than it was in 2019 – an unprecedented period of stagnation for the Federal Republic. In manufacturing, Germany’s traditional engine, the situation is even worse: industrial production peaked in late 2017 and remains 9% lower than a decade ago.
This year, growth is expected to be between 0.5% and 0.8%. Europe as a whole has been stuck with low growth for years, but Germany – the continent’s biggest economy – is far behind its neighbours. Germany’s cumulative growth since late 2019 is a mere 0.8%; the rate in France is 6.3% and Italy 7.4%. In the eurozone overall, cumulative growth is 6.6%, and it’s 6% for the UK.
Why is Germany struggling?
The rise of China is a factor: exports to China fell by a fifth between 2021 and 2025, while car exports halved. But it’s broader than that, with causes including high energy costs, inflexible labour markets and lack of technological innovation. According to Ifo, a leading economic think tank, the economy is undergoing a “profound structural change that is shaped by decarbonisation, digitalisation, demographic changes and geopolitical disruptions”. Compared with other countries, Germany is adapting slowly.
What is in Germany’s reform package?
There are 33 measures altogether, with three main areas sticking out. First, there’s €10 billion-worth of income-tax cuts for lower-and middle-income earners paid for by tax rises for the wealthy. The current top rate of income tax, 45%, will kick in at €250,000 (£212,000, far higher than the UK’s £125,000), but a new 47% rate will take effect at €280,000. Germany’s overall corporate tax burden is set to drop to roughly 25% from 2028 (depending on the state), matching the UK’s.
Second, there are labour-market reforms, including more flexible employment contracts, tighter rules around sick-leave certification, and measures designed to discourage early retirement.
And third, there’s action to cut the bureaucratic burden on businesses, including reducing reporting requirements, simplifying permits, digitising compliance requirements and streamlining data-protection rules where they exceed EU standards. There are also ambitious changes to the pension system, including a new link between the retirement age (eventually set to reach 70) and life expectancy.
Is Germany fiscally stable?
Relative to its European peers, yes. Germany’s famous “debt brake” places strict limits on how much the federal and state governments can borrow – it restricts the federal structural deficit to 0.35% of GDP while strictly prohibiting net debt for federal states. In all, the Merz government plans to borrow about €200 billion next year, 12.5% more than this year, and overall borrowing between 2027 and 2030 is projected at €838 billion.
Germany’s debt-to-GDP ratio will rise to 69.5% next year, still lower than the eurozone average, with the public deficit widening to 4.3% of GDP. As the country’s low borrowing costs testify (ten-year bond yields are a little over 3%, compared with just under 5% for the UK), none of this worries the markets.
Will Germany’s reform package work?
Analysts overwhelmingly agree the package is necessary, but not sufficient. Holger Schmieding, chief economist at Berenberg, described it as “a lot of small steps” that, combined with planned reforms of the country’s welfare system, could “add up to major progress”. On their own, the new reforms are “unlikely to zap life into a rapidly deindustrialising economy that has barely grown since 2019”, agrees The Economist.
But the fact that Merz’s coalition has “shown itself capable of comprehensive action” is cause for celebration. This is a package that could create the framework for future growth, says Carsten Brzeski of ING. What’s still missing is a “clear longer-term strategy for affordable energy for both households and companies, as well as some tax relief for companies”. Still, the package is an encouragingly clear sign that “Germany is at last moving” away from “moaning and analysing” – and “towards tangible action”.
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