Merz ends phone sick notes in German overhaul

Friedrich Merz has picked his political identity: supply-side disciplinarian. The German chancellor's coalition package tightens welfare, restricts sick leave and loosens hiring rules. The theory is straightforward: if more people work under tougher conditions, growth follows. But Germany's core weakness is productivity, how much value each hour of work produces. If the problem is that each hour generates too little, making people work more hours under stricter rules does not solve it.

Three Levers, One Theory

The package has three economic levers. First, welfare becomes more conditional: the coalition replaces Bürgergeld (Germany's basic income support for the unemployed) with Grundsicherung, a new system that demands faster job acceptance, checks assets earlier and punishes non-compliance more harshly (Corriere d'Italia, Euronews PL).

Second, absence becomes harder. Phone sick notes, which let workers get a medical certificate by calling a doctor rather than visiting one, face elimination (DW). The retirement age would rise beyond 67.

Third, hiring rules loosen. Fixed-term contracts become easier to extend, and dismissal protections weaken (Il Fatto Quotidiano, Al Jazeera). Tax relief for middle incomes, financed by higher rates on top earners, rounds out the offer.

One market estimate suggests these reforms could lift Germany's long-run growth speed from about 0.4% to 0.7% (Biz Chosun). Meaningful, but not a transformation, and no independent institution has confirmed the figure.

Labour Discipline Cannot Fix an Investment Gap

The logic behind these reforms is textbook supply-side economics: remove barriers on the production side, and growth arrives. But the German labour market is not obviously short of available workers. Employment fell 0.4% year-on-year in May 2026 (Destatis). Firms are shedding staff, not desperately hiring.

Germany does face real shortages in care, construction and skilled trades. But those gaps reflect training bottlenecks and demographic pressure, not welfare generosity. And the bigger story sits elsewhere: BNP Paribas Economic Research found that real corporate R&D spending grew far faster in the US than in the EU between 2020 and 2024, and that Europe's post-Covid productivity slowdown reflects underinvestment in technology, not too-comfortable benefits (BNP Paribas).

Tighter benefit rules do not generate better software, faster building permits or cheaper electricity. If the bottleneck is energy costs, infrastructure gaps and slow digitalisation, pushing more people toward the labour market creates pressure without creating output.

Who Gains, Who Loses

Employers in labour-intensive sectors gain most directly: lower absence costs, a bigger pool of applicants, easier short-term hiring (Finance Yahoo). Middle-income households may gain from tax relief, though no serious estimate of net effects after taxes and benefits are counted has been published yet.

The losers are concrete: welfare recipients facing harsher sanctions, workers with chronic conditions who relied on phone consultations, older workers whose retirement just moved further away, and temporary staff absorbing more insecurity (Aktuálně.cz). There is a macro risk too: cutting benefits while growth is fragile suppresses household spending, which can undo whatever labour-supply gains the reforms produce.

What Germany's Neighbours Are Waiting For

Germany is the eurozone's largest economy. Polish subcontractors tied to German industry care less about welfare rhetoric and more about whether reform translates into actual investment orders (Interia, Rzeczpospolita). Italian commentators noted the irony: if Berlin itself now combines social discipline with state-backed strategy for autos and chips, it becomes a less convincing voice for fiscal restraint in Brussels (Corriere).

Merz now has to show the package produces investment, not only tougher rules. Germany's neighbours, whose factories depend on German orders, will know the difference before the headline data confirms it.