Recovery, employment, pensions: the ambitions of the new German plan - 13 july 2026

The CDU/CSU–SPD coalition currently in power in Germany presented, on 2 July, a broad-ranging 34-point reform programme structured around five main pillars: (1) cuts in household taxation, (2) greater labour market flexibility, (3) administrative simplification, (4) targeted support for industry, and (5) reform of the pension system. The plan must still be amended and then voted on by the Bundestag. Politically, the signal sent by the German government is strong; economically, however, it still falls well short of a “big bang”, with short-term macroeconomic effects remaining modest. The 2026 plan is intended as a structural complement to the fiscal and investment shock of 2025. The pension reform proposal, although limited, nevertheless places this issue at the heart of the European political agenda, less than a year before the presidential election in France.

A fiscal turning point begun in 2025

Under the combined impact of the collapse of its automotive sector, the energy shock of 2022, the new competitive challenge from China, and pressure exerted by US President Donald Trump, the German government announced as early as 2025 a profound shift in its fiscal framework, alongside a €1 trillion investment plan over 10 years for defence and infrastructure. The 2026 programme “for recovery and employment” extends this effort by complementing it with structural reforms and income tax cuts designed to make it easier to accept.

Targeted tax relief and household consumption

This tax relief benefits middle- and lower-income brackets to the tune of around €10 billion (0.2% of GDP), partly offset by an increase in taxation on higher incomes of around €3 billion, according to Goldman Sachs estimates. Despite its favourable effect on purchasing power, the impact on household consumption over the coming quarters is likely to remain limited.

Labour market reforms and administrative simplification

The other measures have not been costed but are aimed at increasing labour market flexibility by making it easier to hire workers on fixed-term contracts and to dismiss higher-paid employees. Proposals to simplify administrative procedures, particularly in relation to data protection for SMEs, seek to reduce compliance costs and encourage innovation.

Support for industry and the real estate sector

The plan also provides targeted support for industry, notably through faster investment in the electricity grid and an expanded role for the strategic investment fund “Deutschlandfonds”. It also includes measures aimed at the real estate sector, addressing both demand (easier access to mortgage finance) and supply (creation of a federal housing agency). However, no additional public funding is planned under this package.

Effects on potential growth

Taken together, these reforms are intended to raise Germany’s potential growth rate, currently estimated at 0.4% per year by the European Commission. OECD and IMF research suggests that combined structural reforms can add between 0.3 and 0.7 percentage points of GDP per year to potential growth, while also stressing that the gains are more limited when a country already has a high level of GDP per capita. For Germany, the prospects for gains are therefore positive, but remain modest.

Towards a hybrid pension model inspired by the Nordic countries

The government is taking up the proposals of the special commission on pension reform along three lines: (1) linking the retirement age to life expectancy, (2) strengthening the financial sustainability of the system by allocating the additional burden one-third through lower pensions and two-thirds through higher contributions, and (3) introducing a funded pillar. The reform therefore has the appearance of a “Scandinavian” hybrid model, but in a clearly more cautious version. The funded pillar provides for a compulsory contribution of 2 percentage points (around 0.8 percentage points of GDP per year), administered either by a public fund or by a limited number of government-certified alternatives. By comparison, in Denmark and the Netherlands, funded contribution rates range between 10 and 18 percentage points. The increase in contributions will be gradual (+0.5 percentage points per year between 2028 and 2031), which will slightly weigh on disposable income. Although the proposal remains modest for now, it lays the first foundations for the long-term financial sustainability of the German pension system and places the issue at the centre of the European political agenda, less than a year before the presidential election in France.

Short-term impact and stronger resilience

If the plan were adopted in its current form by the Bundestag, its incremental effect on German economic conditions over the coming quarters would be positive but moderate. The efforts undertaken since 2025 are contributing to the expected acceleration in German growth to 1% in 2027, compared with 0.7% in 2026 and 0.2% in 2025, according to the IMF’s July World Economic Outlook.

Beyond the limited impact on average growth, the public policies and reforms announced make the economy more flexible and improve the long-term sustainability of the pension system and, ultimately, the resilience of the economy. This resilience makes it better able to absorb external shocks and to return more quickly to its growth path.

From economic resilience to the financial market

An economy with weak growth but greater resilience provides a favourable environment for financial markets. The risk of economic disaster or a lasting structural change declines. The risk premium demanded by investors to hold risky assets such as equities falls, which increases their valuations and helps revive interest in European equities.