German economy: "2026 must become the year of reforms"

Chancellor Merz visited the International Crafts Fair in Munich and met with leading representatives of German industry. They called on politicians to show more courage in embracing change.

In Munich, Chancellor Friedrich Merz (CDU) met with leading representatives of German industry at the International Crafts Fair. The association presidents demanded action from the... Federal government More courage is needed for change. Given the immense pressure facing Germany as a business location, this year must become a year of reforms.

"Our proven model of success is being challenged in an unprecedented way: by a radically changed world order, increasingly fierce international competition, technological upheavals and noticeable demographic change. At the same time, the business environment has deteriorated considerably in recent years," reads a joint statement from business representatives. 

German economy at a crossroads

After three years without growth, the economy is at a crossroads. While the federal government has taken important measures, these are far from sufficient – ​​many projects have only been announced and not yet implemented. "It is urgently necessary for policymakers to recognize this enormous responsibility and act accordingly," the presidents demand.

The economic climate in Germany will only improve when there are tangible changes that reach businesses and companies. New burdens must be prevented, and existing ones reduced. "Only in this way can growth and competitiveness be strengthened and secured."

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New normal of crises

Jörg Dittrich, president of the German Confederation of Skilled Crafts, spoke of a "new normal of crises" that are following one after another. This has further increased the pressure for reform that already exists in Germany. "We must strive for greater resilience. We must influence the location factors in such a way that self-sustaining growth emerges."

Investments are often held back because many craft businesses are struggling financially. "We have shortcomings in our social security systems. We need more net income in employees' paychecks." Dittrich criticized the fact that the governing parties lost their majority in the Bundestag often did not use it because they could not agree.

Overcoming challenges together

The war in Iran has dramatically worsened the global situation. It poses a further challenge for the German economy. "If the conflict remains temporary, the impact should be limited," said Merz. Nevertheless, there are also enormous problems that need to be solved, regardless of the conflict. "We have the opportunity to overcome these challenges together."

But there is also good news. This includes the various trade agreements that are either already in force or on their way to being implemented. The economy is also recovering, albeit very slowly and primarily thanks to government stimulus, but investments are currently greater than capital outflows. However, this is only small consolation, and the overall economic situation is not satisfactory.

Self-sustaining recovery not guaranteed

"A self-sustaining recovery is not guaranteed," Merz admitted. Therefore, restoring the competitiveness of the economy remains the federal government's priority. This involves a whole range of issues and measures that need to be addressed. "We must tackle structural reforms that have been postponed for far too long."

Taxes and levies are too high, energy is too expensive, and the welfare state needs to be more targeted. Merz announced his intention to reduce labor costs and social security contributions. "If we all—businesses and politicians alike—stand together and do everything we can, then we will find a way out of this economic crisis."

Demands of the German economyMaking social security systems future-proof
Total social security contributions are rising rapidly and unchecked. Structural reforms are necessary in all systems. Only in this way can we ensure that they remain efficient and financially sustainable, and that employers and employees are not burdened further and further. Non-insurance-related benefits should be financed entirely from tax revenue. The need for action is particularly urgent in health and long-term care insurance. At the same time, we need a pension reform this year that curbs the increase in expenditures. This requires raising the retirement age and abolishing incentives for early retirement.

Raising taxes to an internationally competitive level
Germany is a high-tax country compared to other OECD countries and is becoming increasingly unattractive for investment. The planned reduction in corporate tax for corporations should be brought forward, and the income tax scale should be adjusted simultaneously – because for the majority of German companies, income tax is essentially business tax. Higher taxes on wealth, such as inheritance tax on business assets, are absolutely the wrong approach.

Reduce bureaucracy
The German government is on the right track with its efforts to reduce bureaucracy. This path must now be decisively implemented: by abolishing one-third of all disclosure and reporting obligations and half of all documentation requirements for businesses. Greater speed is needed. Instead of merely completing the audit by the end of 2026, at least half of the targeted achievements should be attained by then. The same applies to the targeted reduction of administrative controls. Here, too, we cannot wait until the end of 2027. At the same time, the German government must not undermine its own ambitious goals. The Fair Wages Act and the Pay Transparency Act are two initiatives currently underway that will lead to more bureaucracy for companies.

Lower energy costs
Competitive energy costs are not a luxury, but a fundamental prerequisite for securing Germany's position as a business location and making it attractive for investment again. Energy costs, which are far too high compared to other countries, urgently need to be reduced. In addition to short-term measures such as the promised reduction in electricity tax for everyone, this requires, above all, structural reforms to lower system costs, particularly through efficient grid expansion and bringing the Energy Efficiency Act back into line with European standards.

Speed ​​up planning and approval processes
In Germany, lengthy planning and approval processes stifle growth, innovation, and necessary transformations. This affects industry as well as broadband expansion, the development of livable cities and rural areas, and the modernization of roads, railways, and waterways. For the economy, an ambitious infrastructure reform law and the consistent implementation of the acceleration pact and modernization agenda are essential.

Promoting innovation and resilience
Innovation is the cornerstone of our competitiveness. It is essential to professionalize the transfer of knowledge from science to industry, accelerate funding processes, and intensify the link between security and research. Germany's infrastructure, including its digital, energy, healthcare, and telecommunications infrastructure, must be made resilient. This will only succeed if the framework for private investment in these areas is significantly improved.

Strengthening the EU single market and international trade
To remain competitive internationally, the EU needs a change of course. The EU single market is the home market of the German economy and offers considerable growth potential. The focus must therefore be on economic freedoms. Regulatory and administrative hurdles must be reduced, and all measures must be geared towards growth and investment. The omnibus packages must urgently deliver tangible relief. Open markets and reliable framework conditions are essential to safeguard Europe's competitiveness. The agreements with Mercosur and India must enter into force quickly, and further agreements must follow.
Source: ZDH

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