Chancellor Friedrich Merz's government unveiled a package of 34 reforms aimed at restoring competitiveness to Europe's largest economy after years of weak growth, high energy costs, slowing industrial growth and pressure on the export model.
Key measures cover pensions, taxes, the labor market, industrial policy, energy, housing, infrastructure, trade protection and cutting red tape, according to Reuters. The government expects to pass the main elements of the package in parliament by the end of 2026.
One of the central blocks is tax breaks for households worth about 10 billion euros per year. For a working family with two children, the effect could be more than €600 thanks to increased tax deductions and a softening of progression for middle income earners. It is planned to be partly financed by increasing the top income tax rate from 45% to 47% for the highest incomes — from 280,000 euros per year.
They also want to make the labor market more flexible. Among the measures are the refusal to issue sick leave by phone, the requirement of medical confirmation from the first day of illness, the expansion of fixed-term contracts of up to 48 months for new employees until 2030, and more flexible compensatory dismissal mechanisms for highly paid employees.
The industrial block is aimed at supporting the automotive industry, chemistry, pharmaceuticals, mechanical engineering, clean technologies, batteries, semiconductors and artificial intelligence. It is also planned to expand the investment mechanism of the Deutschlandfonds, speed up the connection of industrial facilities to power grids, and reduce the implementation period of network projects by approximately half.
For Germany, this is an attempt to correct several systemic problems at once. In its May forecast, the European Commission noted that after two years of recession and growth of only 0.2% in 2025, the German economy could grow by only 0.6% in 2026 and 0.9% in 2027. High energy costs, weak exports, competition from China, tariff risks and a delayed recovery in investment were cited as reasons for the weakness.
The package may give Germany a new boost, but it will not be a quick fix. According to an estimate by economists cited by Reuters, if the reform is fully and quickly implemented, it is possible to increase the long-term growth rate of the economy from approximately 0.4% to 0.7% per year. This is an improvement, but not a return to the old pattern of strong industrial growth.
The main effect for the German economy can be manifested through three channels: the reduction of administrative costs for businesses, the growth of domestic demand due to tax incentives and the acceleration of investments in infrastructure, energy and technology industries. But the weak spot remains the same - Germany depends on exports and global industrial chains, and they are now under pressure from geopolitics, tariffs and competition from China.
For Germany's main trading partners, the consequences will be different. In 2025, China again became Germany's largest trading partner with a turnover of 251.8 billion euros. The USA took second place with 240.5 billion euros, the Netherlands - third with 209.1 billion euros. At the same time, the US remained the main market for German exports, although shipments of cars, trailers and semi-trailers to the US fell by 17.8%.
For China, Germany's reforms mean increased competition in industry, especially in the electric vehicle, battery, engineering and clean tech sectors. Berlin separately states its intention to strengthen the EU's anti-dumping and anti-subsidy instruments and to consider technology transfer requirements in strategic sectors for non-European investment. This could make German-Chinese economic relations tougher.
For the US, the effect is twofold. On the one hand, a stronger Germany means more demand for American technology, energy, financial services and industrial equipment. On the other hand, Germany will try to preserve its own industrial base and reduce dependence on external suppliers in strategic sectors, in particular in the field of semiconductors, batteries and artificial intelligence infrastructure.
For the Netherlands and other EU countries, the package of reforms may be rather positive. If German industry and consumption begin to recover, European logistics hubs, component suppliers, machine-building companies, chemical producers and countries integrated into German production chains will benefit.
The main risk of reforms is political and time. Some of the measures may face resistance from trade unions, the medical community and regions, and the economic effect will not appear immediately. Reuters notes that business and economists generally praised the package as necessary, but stressed that everything will depend on the speed and quality of implementation.
In conclusion, the Merz package can be seen as an attempt to rebuild the German growth model: less bureaucracy, more investment, more flexibility in the labor market and more protection of strategic industries. But Germany will not be able to return to its former role as a European locomotive only at the expense of one package of reforms. To do this, it will have to simultaneously solve the problems of expensive energy, demographics, technological backwardness, weak domestic demand and dependence on foreign markets.
