Merz coalition unveils reform package to revive Germany’s economy

Friedrich Merz’s coalition unveiled 34 reform measures on July 2, putting about €10 billion a year in tax relief for low- and middle-income earners at the center of a bid to revive Germany’s economy and blunt the rise of the far right. The package also reaches into pensions, sick-leave rules, bureaucracy reduction and affordable housing, a politically difficult mix that shows how much the chancellor is relying on economic repair to restore confidence in his government.

The wager is taking shape against a weak economic backdrop. Germany’s price-adjusted GDP was 0.2% lower in 2024 than in 2023, extending a run of contraction that has sharpened pressure on Berlin to deliver faster change. Destatis said the economy started 2026 in positive territory after a slight improvement at the end of 2025, but the recovery remains fragile and far from the kind of broad-based growth that would quickly ease public anger.

The labor market is still sending warning signals. In May 2026, Germany had 1.63 million unemployed and an unemployment rate of 3.7%, a reminder that even a technically improving economy is not yet translating into security for many households. That matters politically because recent national polls have put the Alternative for Germany between 27.8% and 29%, ahead of the CDU/CSU at roughly 20% to 24%.

Merz took office in May 2025 with the CDU/CSU and the center-left SPD promising stability, but the coalition has faced criticism for infighting and slow delivery. Business leaders have pressed for faster action, while SPD figures have warned against language they see as borrowed from the far right, underscoring the tension at the heart of the government’s strategy.

The timing is also political. Merz is trying to stabilize his coalition before important state elections later in 2026, especially in eastern Germany, where the AfD is strongest. The government is betting that visible reforms, from lower taxes to changes in housing and pensions, can make the case that mainstream parties can still govern effectively before voters decide whether protest politics has the stronger offer.