Merz tightens Germany’s welfare rules

Friedrich Merz has chosen the political identity he wants to project: the supply-side disciplinarian. His coalition package tightens welfare, restricts sick leave and makes hiring rules more flexible. The argument is simple enough. If more people are pushed into work, and employers face fewer constraints, growth should follow.

The weakness in that argument is Germany's real problem. The country is not only short of workers in particular sectors. It is struggling with productivity: the value produced in each hour of work. If each hour is generating too little, asking people to work more, under tougher rules, does not by itself repair the machine.

Three Levers, One Theory

The package has three economic levers. The first is welfare. The coalition wants to replace Bürgergeld, Germany's basic income support for the unemployed, with Grundsicherung, a stricter system that requires faster acceptance of job offers, checks assets earlier and imposes harsher penalties for non-compliance (Corriere d'Italia, Euronews PL).

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

The third is hiring. 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 through higher rates on top earners, completes the political offer.

One market estimate suggests the reforms could raise Germany's long-term growth rate from about 0.4% to 0.7% (Biz Chosun). That would matter, but it would not be a transformation. No independent institution has confirmed the figure.

Labour Discipline Cannot Fix an Investment Gap

The thinking behind the package is familiar supply-side economics: remove obstacles on the production side and growth will come. But Germany's labour market does not look like one where firms are simply desperate for available workers. Employment fell 0.4% year-on-year in May 2026 (Destatis). Companies are cutting staff, not hiring at any cost.

There are genuine shortages in care, construction and skilled trades. Those shortages come from training bottlenecks and demographic pressure, not only from welfare rules. 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 excessively comfortable benefits (BNP Paribas).

That distinction matters for Malta too. When Germany slows, the effect moves through the eurozone: export orders, interest-rate expectations, investment sentiment and, eventually, the operating climate for a small open economy like ours. Berlin's domestic labour rules are not a German-only story when Germany remains the eurozone's industrial anchor.

Tougher benefit rules do not produce better software, faster planning approvals or cheaper electricity. If the bottleneck is energy costs, weak infrastructure 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 gain most directly: lower absence costs, a larger pool of applicants and easier short-term hiring (Finance Yahoo). Middle-income households may gain from tax relief, although no serious estimate has yet shown the net effect once taxes and benefits are counted together.

The losers are easier to identify. Welfare recipients face tougher sanctions. Workers with chronic conditions who relied on phone consultations lose flexibility. Older workers see retirement move further away. Temporary staff carry more insecurity (Aktuálně.cz).

There is also a wider economic risk. Cutting benefits while growth is weak can reduce household spending. That matters because demand is not a side issue: if households pull back, the gains from a larger labour supply can be partly cancelled out.

What Germany's Neighbours Are Waiting For

Germany is the eurozone's largest economy. Polish subcontractors tied to German industry are less interested in welfare rhetoric than in whether the package leads to real investment orders (Interia, Rzeczpospolita). Italian commentators have pointed out the irony: if Berlin now combines social discipline with state-backed strategy for cars and chips, it becomes a less convincing preacher of fiscal restraint in Brussels (Corriere).

For Malta, the point is practical rather than ideological. A stronger Germany supports the eurozone environment in which our tourism, financial services, aviation, gaming and import-heavy economy operate. A Germany that merely disciplines workers without lifting investment leaves the rest of Europe waiting.

Merz now has to prove that the package produces investment, not only stricter rules. Germany's neighbours, especially those whose factories depend on German orders, will see the answer before the headline data catches up.