Merz Tightens Germany’s Welfare Rules

Friedrich Merz has settled on the kind of chancellor he wants to be: a supply-side disciplinarian. His coalition package tightens welfare, makes sick leave harder to access and gives employers more room to hire and fire. The argument is simple enough. Put more people under more pressure to work, and growth will follow.

The difficulty is that Germany’s weakness is not only the number of hours worked. It is what those hours produce. If each hour of work is generating too little value, stricter rules may change behaviour at the margins, but they do not by themselves fix the machinery of the economy.

Three Levers, One Theory

The package has three main levers. The first is welfare conditionality. The coalition plans to replace Bürgergeld, Germany’s basic income support for the unemployed, with Grundsicherung, a new system that demands quicker acceptance of job offers, checks assets earlier and applies tougher sanctions for non-compliance (Corriere d'Italia, Euronews PL).

The second is absence. Phone sick notes, which allow workers to get a medical certificate by calling a doctor rather than attending in person, are to be scrapped (DW). The retirement age would also rise beyond 67.

The third is labour-market flexibility. Fixed-term contracts would become easier to extend, while dismissal protections would be weakened (Il Fatto Quotidiano, Al Jazeera). Tax relief for middle incomes, funded by higher rates on top earners, is the sweetener.

One market estimate suggests the reforms could lift Germany’s long-run growth rate from about 0.4% to 0.7% (Biz Chosun). That would matter. It would not, on its own, amount to a German revival, and no independent institution has yet confirmed the figure.

Labour Discipline Cannot Fix an Investment Gap

The economics behind the package is familiar: clear obstacles on the supply side, and the economy can expand. But Germany’s labour market is not obviously crying out for idle workers. Employment fell 0.4% year-on-year in May 2026 (Destatis). Companies are cutting staff, not queuing up to take them on.

There are genuine shortages in care, construction and skilled trades. But those shortages come from training bottlenecks and an ageing population, not simply from a welfare system that is too generous. The larger problem lies 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 rather than over-comfortable benefits (BNP Paribas).

Tighter benefit rules do not produce better software, faster planning decisions or cheaper electricity. If the blockages are energy costs, infrastructure gaps and slow digitalisation, pushing more people towards the labour market creates pressure before it creates output.

Who Gains, Who Loses

Employers in labour-intensive sectors are the clearest winners. They get lower absence costs, a larger pool of applicants and more freedom to use short-term contracts (Finance Yahoo). Middle-income households may gain from tax relief, though no serious estimate has yet shown the net effect once taxes and benefits are counted together.

The losers are easier to identify: welfare recipients facing harsher sanctions, workers with chronic conditions who relied on phone consultations, older workers whose retirement has moved further away, and temporary staff carrying more insecurity (Aktuálně.cz). There is a wider risk as well. Cutting benefits when growth is weak can suppress household spending, cancelling out some of the gains the reforms are meant to deliver.

What Germany's Neighbours Are Waiting For

Germany is still the eurozone’s industrial anchor, which is why this package matters well beyond Berlin. Polish subcontractors tied into German supply chains will care less about the welfare rhetoric than about whether the reforms lead to real investment orders (Interia, Rzeczpospolita). Irish exporters and multinationals watching the German market will be asking much the same question: will this create demand, or only discipline?

Italian commentators spotted the awkwardness for Berlin. If Germany now mixes social discipline with state-backed strategy for cars and chips, it becomes a less persuasive preacher of fiscal restraint in Brussels (Corriere).

Merz now has to prove that the package produces investment, not just tougher rules. Germany’s neighbours, whose factories and order books depend on German demand, will see the answer before the headline data catches up.