BERLIN — German Chancellor Friedrich Merz on Thursday announced a coalition agreement to cut taxes for low- and middle-income earners and advance a broader package of economic reforms aimed at reviving his country’s stagnant economy.
The announcement comes as the chancellor is under intensifying pressure to demonstrate that his ideologically divided coalition can enact the far-reaching reforms — from taxes to pensions — that it has long promised in an effort to stem voters drifting toward the far-right Alternative for Germany (AfD) party.
“I expect that as soon as it becomes clear that we are staying on the right track with these measures, public approval of the federal government will rise, as will approval of individual members of the federal government,” said Merz. “That is why we are doing this now — so that we can do what is right for the country, and so that citizens can see that the government is on the right track.”
The chancellor’s approval ratings have fallen to new lows recently, mirroring the declining popularity of his governing coalition. Only 12 percent of Germans said they were satisfied with the government’s performance in last month’s benchmark ARD Deutschlandtrend survey. At the same time, the AfD is leading national opinion surveys and maintaining an even bigger lead in the polls in two eastern German states that will hold elections in September — something that would put the far-right party in a position to potentially assume real governing power for the first time since its founding in 2013.
Merz framed the blueprint tax reform deal between his conservatives and their center-left coalition partners in the Social Democratic Party (SPD) as providing much-needed tax relief for families, though it’s unclear whether the level of relief provided will satisfy disgruntled voters.
A household of two adults and two children with a taxable income of €60,000 is expected to save around €600 a year, according to a coalition document detailing the plan. The reform is to be financed primarily by increasing taxes on high earners: raising the tax rate to 45 percent on incomes of €250,000 and above, and to 47 percent on incomes of €280,000 and above.
The coalition leaders also agreed on other measures announced Thursday to boost Germany’s export-oriented economy, including a new trade strategy intended to protect the bloc’s biggest economy against unfair competition from China by committing to EU preferential rules in strategic areas with public funding programs.
“In strategically important areas such as infrastructure or defense, we will focus on European production — that is, local content,” said SPD Finance Minister Lars Klingbeil. “Our position is clear: We want open trade. But we will not accept others who do not play by the rules and use unfair means to destroy jobs and business models here.”
The leaders also set out to boost domestic competitiveness by incentivizing work on Sundays and making it harder for German workers to take sick leave. Merz had repeatedly criticized German workers for taking too many sick days and hampering economic growth.
The announcement comes after the coalition’s agreement in June to reform the country’s pension system — and follows another reform agreement intended to bring the cost of health insurance premiums under control.
Merz had announced his intention to strike these sweeping coalition deals before the parliamentary summer recess, which begins at the end of next week, in order to prove the political mainstream can deliver ahead of the eastern German elections in September.
“We all agree that the political center must step up here and now,” said Merz. “Never before have we all had to get used to new things so quickly and so often. That’s also why I understand the longing for the old ways, for what’s gone, for the past. But we can’t hide in the past. In these new times, we must now take bold action and drive things forward.”
The agreed reforms still require approval by the full cabinet and passage through parliament.