Germany Cuts Taxes To Break Stagnation

Germany has spent three years either shrinking or standing still. On 2 July, the CDU/CSU-SPD government answered with a 34-point package built around roughly €10 billion a year in income-tax relief, tighter sick-leave rules and easier hiring on temporary contracts (Reuters via Internazionale, Al Jazeera). The same government expects growth of just 0.5% this year (ThePrint).

For Malta, this is not a distant German domestic story. Germany remains the engine around which much of the eurozone is built. When that engine misfires, the effects travel through supply chains, EU budgets and interest-rate politics before they reach smaller economies such as ours.

Berlin’s calculation is simple enough. Lower taxes leave households with more money, looser hiring rules reduce the risk for employers, and pension changes are meant to contain future labour costs. The harder problem is that Germany’s weakness is rooted in poor business investment and an export model that no longer works as smoothly as it once did. A package centred on income tax and labour rules may ease pressure, but it does not automatically make companies invest.

What changes

The tax cuts are aimed at lower and middle earners. The coalition says a typical family would keep around €600 more per year from 2027, though that figure has not yet been confirmed by an independent estimate (Euronews, Tagesschau). Higher earners will pay more: the Reichensteuer, the additional levy on high incomes, rises to 45% above €250,000 and 47% above €280,000, instead of a flat 45% (Reuters via Internazionale).

The sick-leave change is about certification, not wage replacement. Workers would need a doctor’s certificate from the first day of illness, ending phone-based sick notes. The German Association of General Practitioners called the plan "absolutely catastrophic" for an already stretched primary-care system (The Straits Times, Indian Express). The case for the change is disputed: Germans take about 15 sick days a year on average, fewer than workers in France or most Nordic countries (The Telegraph).

Employers would get more scope to use fixed-term contracts, reportedly for up to 48 months without having to give a specific reason. Pension reform would link the retirement age to life expectancy after 2031, following a commission’s recommendations (Al Jazeera).

Not big enough

Berenberg economist Holger Schmieding put it plainly: no single measure is new territory, and full implementation might raise Germany’s long-term growth pace from about 0.4% to 0.7% (Chosun Biz). That is modest for an economy the Bundesbank sees as having a competitiveness problem, not just a cyclical dip.

The fiscal side is still unresolved. The finance ministry examined tax-relief options worth up to €25 billion; the coalition chose the cheaper end of the range (Deutschlandfunk). Ifo president Clemens Fuest warned that tax cuts cannot be sustained unless spending growth slows as well (ThePrint).

Nor is the reform law yet. The income-tax changes need approval from the Bundesrat, Germany’s upper chamber, where the federal states sit. Those same states would lose revenue from the cuts, so Berlin still has to pass the measure through the part of the system that pays part of the bill.

Who gains, who loses, who's watching

Workers get a divided offer. Those already in stable jobs keep more of their pay. Those entering the labour market may face longer periods on fixed-term contracts with weaker protection. IG Metall chair Christiane Benner called expanded fixed-term hiring "an attack on workers’ rights", while the employers’ association described the package as "a long-overdue change of course" (DW).

The pension change also cuts both ways. Linking retirement to life expectancy protects younger workers from ever-higher payroll costs, but it can punish people in physically demanding work if exemptions are too narrow. That distinction matters in Malta as much as in Germany: a retirement rule that looks tidy in a ministry paper often lands very differently on a construction worker, a carer or a hotel cleaner.

Germany’s stagnation is already hurting its neighbours. Polish automotive exports to Germany fell 14.5% year on year in the first quarter of 2026 (netTG). Czech automotive production accounts for roughly a tenth of GDP, with Škoda Auto alone making up about 5% (PRESS1.cz). The Netherlands still counts Germany as its most important trading partner (CBS).

There is also a Brussels angle that smaller member states will watch closely. Berlin is cutting taxes at home while pushing for roughly €400 billion in cuts to the EU’s proposed 2028-2034 budget (upday). That means domestic stimulus in Germany and restraint at EU level. Countries that depend more heavily on EU programmes, including small states that feel every shift in the budget, will read the contradiction clearly.

The real test is not whether German households spend the extra €600. It is whether German firms begin investing and hiring permanent staff again. If they do not, the tax relief will pass through the economy while investment stays weak and Central European suppliers absorb another round of pressure. For the eurozone, and for Malta inside it, that would mean Germany has bought time without fixing the machinery.