Germany, Europe's largest economy, has embarked on a sweeping overhaul that will simultaneously revamp its sick leave, dismissal, and pension systems. The German coalition government led by Chancellor Friedrich Merz on the 2nd (local time) unveiled a structural reform plan, the "Relaunch and Employment Program," spanning 34 areas including pensions, labor, taxation, industry, dwellings, and administration.
From now on, German workers will have to visit a doctor and submit a medical certificate from the first day they miss work with a cold. High-income workers earning more than 180,000 euros a year (about 320 million won) can be dismissed more easily than now in exchange for monetary compensation. Retirement timing will be pushed back step by step in line with life expectancy. Analysts say Germany, which has emphasized job security and worker protections, has begun to overhaul at once the core welfare-state systems of sick leave, dismissal, and pensions.
Chancellor Merz held a press conference in Berlin with The Social Democratic Party of Korea Co-chairpersons Lars Klingbeil and Bärbel Bas, and Christian Social Union (CSU) leader Markus Söder, saying, "We will put Germany back on the right track." The coalition leadership reached a deal on the reform plan after an all-night negotiation that lasted seven hours the previous day.
In April, the German government cut this year's growth forecast to 0.5%, half of the previous outlook. Next year's outlook was also lowered from 1.3% to 0.9%. Germany's export- and manufacturing-centered growth model, which it had counted on, is wobbling as cheap Russian energy was cut off by the war in Ukraine and the automobile, machinery, and chemical markets are being encroached upon by China. The workforce is also shrinking due to aging. Reuters said, "The Merz government, trailing the far-right Alternative for Germany (AfD) in approval ratings, has stressed the urgency of reforms," adding, "There is even talk that AfD could capture a State Governments for the first time in the Sept. Saxony-Anhalt election."
This reform package follows the 500 billion-euro (about 887 trillion won) special infrastructure fund created by the German government in March last year. Germany had been a byword for fiscal austerity even within the eurozone, but recently it has relaxed fiscal rules and shifted toward direct state investment in rail, power grids, and digital sectors. This time, to ensure that the money translates into real growth, it has moved to institutional reforms that boost labor supply and corporate productivity. The state will expand investment and tax cut, while demanding flexibility in workforce management from corporations and a longer working life and stricter work discipline from workers.
However, anticipating stronger backlash if it pushed only labor-market flexibility, it also strengthened redistribution policies. The package is the product of the coalition combining labor-market flexibility demanded by the conservative Christian Democratic Union and Christian Social Union (CDU and CSU) with redistribution policies advocated by the center-left The Social Democratic Party of Korea (SPD). The Merz government met conservative supporters' demands by tightening sick leave rules, expanding fixed-term employment, and easing dismissals for high earners, while balancing this with a tax cut for middle- and low-income groups, an increase in child benefits, higher taxes on the wealthy, and an expansion of public dwellings.
In exchange for asking the public to work longer, the structure lowers household tax burdens and has top earners shoulder more of the cost. Accordingly, starting in January next year, the German government will cut income taxes for middle- and low-income groups by 10 billion euros a year (about 1.77 trillion won). Chancellor Merz said "an average dual-income family with children will see 600 euros (about 1.06 million won) in annual relief." The current monthly child benefit of 259 euros (about 460,000 won) will also be raised to 272 euros by 2028. Part of the funding will come from raising the top tax rate for high earners with annual income above 280,000 euros (about 496 million won) from 45% to 47%. By bundling household tax cut with higher taxes on high earners, the design appears intended to head off criticism that labor-market reform "gives benefits to corporations and asks only workers to sacrifice."
German workers had been able to take the first three days of sick leave without a medical certificate. Since the COVID-19 pandemic, the system had been relaxed to allow obtaining sick leave confirmation with a single phone call. In this reform plan, the government abolished this phone-based sick leave and required a doctor's certificate from the first day of illness for leave to be recognized. Chancellor Merz has argued that "habits like four-day workweeks or frequent sick leave undermine Germany's competitiveness." The cap on fixed-term contracts, during which corporations do not have to explain nonrenewal reasons, will be increased to 48 months, twice the current 24 months. Separately, the threshold was lowered so that, starting as early as next year, high-earning workers making at least 1.75 times the pension contribution cap—currently about 180,000 euros in annual salary (about 320 million won)—can be dismissed on the condition of "appropriate monetary compensation."
The Merz government judged that as the young population paying premiums shrinks and beneficiaries increase, people must work longer to maintain current pension levels. Accordingly, the reform plan specifies that all 33 recommendations issued by the pension commission on the last month will be implemented and related legislation will be completed within the year. The basic pay-as-you-go structure, in which retirees' pensions are funded by premiums paid by the working generation, will be maintained. Instead, a Swedish-style reserve fund will be introduced to invest part of the resources in capital markets such as stocks and bonds. The current retirement age of 65 to 67 will be raised step by step in line with increases in life expectancy, and early retirement will be curtailed. It also includes strengthening finances by requiring freelancers to pay premiums into the public pension.
Marion Mühlberger, a researcher at Deutsche Bank Research, said "the German government has agreed on one of the biggest reform packages in decades." By contrast, Christiane Benner, Chairperson of IG Metall, Germany's largest union, welcomed the worker tax cut but criticized the expansion of fixed-term contracts as "an attack on workers' rights." Markus Blumenthal-Bayer, head of the German Family Doctors Association, called the overhaul of sick leave rules "completely catastrophic," saying it would dump administrative burdens on clinics and only lengthen patient wait times.
Clemens Fuest, head of the Ifo Institute for Economic Research, told Reuters that "the biggest weakness of this package is the lack of measures to control government spending," adding, "Without curbing expenditure growth, the tax cut will be hard to sustain in the medium term." Berenberg Bank estimated that if the reforms are fully implemented, Germany's trend growth rate could rise from 0.4% a year to 0.7%.