German coalition agrees on sweeping reform package

German coalition agrees on sweeping reform package July 2, 2026Germany's Chancellor Friedrich Merz said his conservative CDU/CSU bloc and the center-left Social Democrats (SPD) had approved a "catalog of significant reforms" to modernize the economy and restore competitiveness. The announcement came at a press conference on Thursday, with Merz alongside SPD leaders Bärbel Bas and Lars Klingbeil, as well as the leader of Bavaria's conservative Christian Social Union, Markus Söder. The four coalition leaders had met in Berlin the previous day to hammer out the final details of the reform package. Measures include €10 billion ($11.4 billion) in income tax relief, the end of phone-based sick notes, and the implementation of pension commission proposals by the end of 2026. Germany's reform plan at a glance - Pensions: Implementing pension commission proposals, including a new investment-based element to Germany’s mainly pay-as-you-go state pension system, and gradually raising the retirement age over the coming decades. - Tax: Giving households around €10 billion in annual relief, partly funded by raising the top tax rate from 45% to 47% for very high earners. - Labor: Abolishing workers' ability to obtain sick notes by phone, requiring medical certificates from day one of sickness, and giving firms more flexibility on fixed-term contracts and dismissals for high earners. - Industry: Supporting strategic sectors including cars, chemicals, medicines, batteries, semiconductors, AI and clean tech. - Welfare: Tightening action against benefits fraud through more data sharing and stronger enforcement. - Energy: Speeding up electricity grid expansion and giving industry clearer grid-connection timelines. - Trade: Strengthening EU anti-dumping and anti-subsidy tools, with more scrutiny of strategic non-European investments. - Housing: Creating a federal housing company, supporting affordable housing and easing mortgage financing. - Bureaucracy: Cutting forms and reporting duties for companies, and automatically approving some applications if officials do not act within four months. What has the government said about the plans? "We are providing relief to employees and businesses by cutting taxes and reducing bureaucracy. We have now completed our first year of reform. From the very beginning, we set an agenda serving a single goal: We want to get Germany moving again. It is now clear that this is possible," Merz said. With his party lagging behind the far-right Alternative for Germany party in polls, Merz faces pressure to pass reforms to reinvigorate Europe's largest economy but has struggled to overcome wrangling within the coalition. Appearing alongside Merz at the Chancellery garden press conference, the three other leaders of the coalition parties enthusiastically hailed the reforms. Klingbeil, the SPD co-leader and finance minister, said he believes the reforms will enjoy widespread public support, particularly regarding fairness. The coalition had "agreed on solutions that can be supported by a broad majority of our society," he said, adding that he was "firmly convinced that these decisions will give our country new strength." Bas, another SPD co-leader, said the package would "indeed ensure that the economy grows again, that we achieve growth and secure jobs, while maintaining social balance, and, above all, that we strengthen cohesion within our country." Meanwhile, CSU leader Söder described the package as "well-rounded." Each coalition partner would have liked to see more in certain areas, he said, adding, "But a coalition means compromise." "We are making progress," said Söder. While the package was not a "big bang" in itself, he noted, it was another step away from economic stagnation. Who is in favor of the reforms? Deutsche Bank CEO Christian Sewing welcomed the reform package, describing it as an important launchpad to restore Germany's competitiveness. "This reform package is a very successful starting point and supports our call for reforms that promote growth, competitiveness and innovation," the head of Germany’s biggest bank said. Sewing added that the government must now maintain that momentum, push ahead with implementation, and launch further reforms. The German Insurance Association (GDV) warmly welcomed the governing coalition's measures aimed at boosting growth. "What is now decisive is swift and consistent implementation as part of the parliamentary process," said GDV Managing Director Jörg Asmussen. Rainer Dulger, president of the Confederation of German Employers' Associations, also welcomed the coalition's reform package as a "long-overdue change of course." Dulger said the package strengthened competitiveness and confidence. However, he also called for further measures, arguing that social security contributions remained too high and that there were no signs of relief for high performers and major contributors. Who is against the reforms? The Verdi services trade union has sharply criticized the government's reform package, viewing the planned requirement for workers to provide a doctor's certificate from the first day of illness as an expression of a culture of mistrust. "Mistrust toward employees and the expansion of the madness of fixed-term employment contracts do not create growth," said Frank Werneke, head of Verdi, which is Germany's second-largest trade union. IG Metall, Germany's largest trade union, was more ambivalent in its response than Verdi, describing the package as a "mixed bag of light and shadow." Christiane Benner, the union's chair, welcomed planned tax relief for workers. But she lamented the expansion of fixed-term employment contracts, calling it an "attack on workers' rights." She also opposed the abolition of telephone sick notes, saying it fulfilled employers' "antisocial wish list." Felix Banaszak, co-leader of the environmentalist Green Party, sharply criticized the government's reform package, saying it amounted to a "vote of no confidence in citizens." The socialist Left Party condemned the coalition's reform package as a "program of mistrust and ignorance." "A few euros less in taxes do not compensate for higher living costs, insecure pensions, and rising burdens in the healthcare system," the party leadership said. Family doctors described the government's plans on sick notes as "absolutely catastrophic." Markus Blumenthal-Beier, chairman of the German Medical Association, said the coalition was "accepting the complete overburdening of our doctors' practices." He said it would lead to a "massive wave of bureaucracy" and longer waiting times for patients in need. Edited by: Sean Sinico, Dmytro Hubenko