Merz coalition agrees reform roadmap, with tax, pension and energy decisions due by July

Germany’s coalition government has set itself a July deadline to deliver a long-promised package of structural reforms, after a six-hour meeting on May 12 ended months of internal drift on tax, pensions and energy. The CDU/CSU bloc and the centre-left SPD now have until the summer parliamentary recess to convert headline commitments into legislation.

Chancellor Friedrich Merz took office in May 2025 promising a swift reset for Europe’s largest economy, which had narrowly exited recession with growth of only 0.2 percent in 2025. Twelve months in, much of the agenda remains in the pipeline, and the coalition’s majority of twelve seats leaves limited room for internal dissent.

What has already been agreed

The coalition treaty signed in spring 2025 set out a pro-business core, parts of which are now moving from paper into law:

• A corporate tax rate cut of one percentage point per year for five years from 2028, paired with a 30 percent depreciation allowance on equipment investment between 2025 and 2027.
• A reduction in electricity tax and grid fees, intended to lower industrial and household power prices by at least five cents per kilowatt-hour.
• A permanent cut in VAT on restaurant food from 19 to 7 percent.
• Tax-free overtime pay, and an income exemption of up to 2,000 euros per month for retirees who continue working.
• An increase in the statutory minimum wage to 15 euros per hour from 2026.
• A planned reform of unemployment benefits with stricter sanctions for those who refuse offered work.
• Abolition of the Supply Chain Due Diligence Act, which businesses had argued imposed disproportionate compliance costs.

A 500 billion euro infrastructure and defence spending package, agreed in March 2025 before Merz took office, sits behind these structural measures.

Pensions: a holding action, not a structural fix

In December 2025 the Bundestag approved a pension package by 318 votes to 224, after a rebellion by eighteen younger CDU MPs nearly cost Merz his majority. The package holds the pension level at 48 percent of average wages until 2031 and provides tax breaks for retirees who keep working.

Critics inside the coalition argue the measure defers the demographic challenge rather than solving it, at a projected cost of up to 15 billion euros per year. A government pension commission is expected to deliver structural proposals by mid-2026.

What is still on the table

The May meeting agreed to address the toughest remaining items before the parliamentary recess:

• Reform of income tax brackets, with the SPD seeking relief for low and middle incomes and the CDU pushing broader cuts.
• Further measures on energy costs, including fuel price relief for households and businesses.
• The Building Energy Act, renamed in December as the Building Modernisation Act, with reforms intended to make heating regulations more flexible and technology-neutral.

The coalition has also established a National Security Council under Merz, an attempt to coordinate foreign and defence policy across ministries that have traditionally acted independently.

Why it matters

For voters, the test is simple: whether the package, taken together, restores growth and brings down energy costs. For Merz, the political weather is rough. The CDU narrowly won a state election in Rhineland-Palatinate in March 2026, but the SPD has slid behind the far-right AfD in national polling, and five state elections remain on the calendar this year. Reforms delivered after July, rather than by it, are unlikely to land before voters do.

Validation by AI: through the lens of Ludwig Erhard

This section applies the documented economic principles of Ludwig Erhard, architect of West Germany’s post-war Wirtschaftswunder, to the coalition’s reform package. The voice is a stylisation by AI, not a quotation.

Wohlstand entsteht nicht durch staatliche Versprechen, sondern durch den Mut, Wettbewerb zuzulassen. The corporate tax reductions and the depreciation allowance point in the right direction, but a five-year phase-in starting only in 2028 is too cautious for an economy that has already lost ground. The cut in electricity tax and the abolition of the Supply Chain Act echo what I always argued: the state should set the rules of the game and then let producers compete, not micromanage their inputs. The pension package, however, troubles me. To hold the benefit level at 48 percent until 2031 with no structural answer is to mortgage tomorrow’s wages for today’s peace, and a welfare state that forgets thrift devours its own foundation. The 15 euro minimum wage, set politically rather than by the independent commission, weakens the principle that wages should follow productivity. Genuine Wohlstand für Alle comes from real growth shared, not from rates legislated. My verdict, in short: the supply-side instincts are correct, the pace is too slow, and the pension chapter is the kind of postponement that future Germans will pay for. Maß halten, meine Damen und Herren. Discipline today is generosity tomorrow.