German Chancellor Friedrich Merz has announced an ambitious package of labour and economic reforms aimed at reviving the country’s sluggish economy, improving productivity and restoring public confidence in his coalition government. The reform programme, comprising 34 measures, is being projected as one of Germany’s most comprehensive policy overhauls in recent years and is expected to be placed before Parliament later this year.
Presenting the reform agenda in Berlin after lengthy discussions within the ruling coalition, Merz said Germany needed to emerge from its prolonged economic slowdown and regain stronger growth. He expressed confidence that the proposed measures could help push the country’s economic growth beyond one per cent in 2027, significantly higher than the current projections. Germany, Europe’s largest economy, has struggled with weak industrial output, declining investments, rising energy costs and increasing global competition over the past few years.
A major focus of the reforms is the labour market. The government plans to introduce more flexible employment rules by allowing companies greater freedom in offering fixed-term contracts. The package also proposes extending Sunday operating hours for certain businesses, including bakeries and cafés, to provide greater flexibility to employers and stimulate economic activity.
Among the most debated proposals are changes to Germany’s sick leave policy. Under the current system, employees can obtain medical leave certificates remotely or remain absent for a limited period without immediately visiting a doctor. The new rules would require employees to submit a medical certificate from the first day of illness if requested by their employer. Merz argued that Germany’s high rate of sick leave has adversely affected productivity and that stricter regulations are necessary to improve workplace efficiency. However, labour unions and healthcare groups have criticised the proposal, saying it places unnecessary pressure on workers and reflects a lack of trust in employees.
The reform package also seeks to provide financial relief to households through tax reductions. According to the government, low- and middle-income families will benefit from annual tax savings, with a typical working family expected to receive more than 600 euros in relief once the reforms are fully implemented. The overall tax relief is estimated to total around 10 billion euros annually. To offset the revenue loss, the government proposes increasing the highest income tax rate from 45 per cent to 47 per cent for individuals earning more than 280,000 euros a year.
Pension reforms form another key component of the government’s strategy. The coalition plans to gradually raise the retirement age in line with increasing life expectancy while introducing a capital-backed pension system to strengthen long-term sustainability. The government says these measures are intended to ease pressure on the country’s ageing social security system and ensure adequate pension funding in the future.
To improve Germany’s investment climate, the government has proposed reducing bureaucratic procedures, simplifying approval processes for infrastructure projects and cutting administrative burdens on businesses. It also intends to reduce staffing across federal ministries through increased digitisation while promoting investment in strategic sectors such as artificial intelligence, semiconductors and clean energy technologies.
The reforms come at a politically significant time for Merz, whose coalition has witnessed declining approval ratings and growing criticism over its handling of the economy. The government is also facing increasing pressure from the far-right Alternative for Germany (AfD), which has gained momentum in national opinion polls ahead of several important regional elections. While business organisations and many economists have welcomed the reforms as a necessary step towards improving Germany’s competitiveness, several analysts caution that their success will depend on swift implementation and sustained political commitment. Labour unions, meanwhile, have warned that certain measures could weaken employee protections even as they seek to boost economic growth.
