Germany has an economic plan at last

German Chancellor Friedrich Merz
German Chancellor and leader of the Christian Democratic Union (CDU) Friedrich Merz attends a press conference following a government coalition board meeting at the Chancellery, in Berlin,... Read more
BERLIN, July 8 (Reuters Breakingviews) - After a year of hesitation and half-baked attempts at reform, Friedrich Merz seems ready to address Germany’s economic malaise. The conservative chancellor ​and his center-left coalition partners have agreed on their first serious plan
to get the economy moving again. ‌Their 2027 budget which will be presented to parliament this autumn, and partly financed by more than €200 billion worth of borrowing, confirms Merz’s determination to break Germany’s decades-old debt taboo.
The reforms, and the budget, could lift Germany’s anemic growth rate as soon as this year, according to ​Deutsche Bank economists. A lot will however depend on whether an unpopular chancellor can find the political energy ​to convince restive voters of its benefits.
Steps to increase the retirement age and create a mandatory ⁠funded state pension fund will go a long way to stabilise the pension system in a fast-aging country. They come together ​with plans to make labour markets more flexible and some serious attempts to cut red tape, which according
to the Ifo ​Institute for Economic Research cost the economy €150 billion per year. Among other measures, emails will replace paper government forms. Merz also included €10 billion worth of tax cuts for low and middle-income households, partly financed by an increase from 45% to 47% of the top tax rate, which ​kicks in at €280,000 a year.
Berlin, meanwhile, will keep spending on both defence and infrastructure, as Merz promised when he was ​first elected in May 2025. The new government then did away with the constitutional "debt brake" that limited budget deficits to 0.35% of ‌GDP.
The core ⁠defence budget will increase by 33% next year to €109 billion, and €55 billion will be raised from the special €500 billion fund created last year to invest in the country’s decrepit infrastructure. Even then, gross government debt will remain below 70% of GDP next year — compared to 88% for the eurozone and 120% for France, according to IMF forecasts
.
Merz’s economic plan is one of ​the most significant adopted in Germany ​in years although as noted
⁠by ING, it will not transform stagnating Germany into a booming economy overnight. More tax and labour market reforms will be needed to make the country's industry competitive again and the labour ​force more productive
.
The first test of this plan will come in September when far-right party ​AfD has a ⁠chance to take over one or maybe two regional governments. Merz has now shown that he’s ready to tackle his country’s economic challenges while reaching compromises with his coalition partners that are more than fudges.
Follow Pierre Briancon on Bluesky
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Context News

    Editing by Aimee Donnellan; Production by Streisand Neto

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