Germany’s Landmark Reform Package: 48-Month Fixed-Term Contracts, No Sick Note by Phone, and a New Wealth Tax Brewing

Chancellor Merz's reform package includes expanded fixed-term contracts, pension overhaul, and a wealth tax, but critics warn of job losses and insufficient economic recovery.

Chancellor Friedrich Merz presented a 34-measure reform package to the Bundestag on Thursday, spanning labour market flexibility, pension overhaul, and bureaucracy reduction. But as the government projects modest economic growth — 0.5 percent in 2026 and 0.9 percent in 2027 — critics from both business and academia warn the changes could cost jobs and fail to deliver a genuine recovery.

The centrepiece of the labour-market reforms is a significant expansion of fixed-term employment without a specific reason. Under the new rules, such contracts can run for up to 48 months, with as many as six extensions allowed within that period. At the same time, dismissal protection for high earners would be scrapped — specifically for anyone earning more than €177,000 gross per year.

Sick leave rules are also being tightened. The option of a telephone-based sick note will be abolished, replaced by a mandatory requirement to obtain a medical certificate from the first day of illness. The Federation of German Industries (BDI) has welcomed that change, along with measures to ease the introduction of AI systems in companies and tax benefits for severance payments when workers change jobs quickly.

The pension component is being billed as the biggest overhaul in two decades, shifting toward greater reliance on capital-market-funded retirement savings. Despite the changes, social contributions are expected to remain at 43 percent, according to current calculations.

That stability has not quelled criticism. The BDI’s managing director, Tanja Gönner, defended the package on Friday against accusations of being “minimal consensus,” but conceded that it falls short of what would be needed for a comprehensive economic upswing. Her organisation is particularly unhappy that the government has not fully abolished the solidarity surcharge — a tax originally introduced after reunification. With relief measures totalling around €10 billion, the BDI says the package underwhelms.

Adding to business frustration, the government also plans a “wealth tax” that would introduce a top marginal income tax rate of 44 percent on earnings above €200,000. That move has drawn sharp criticism from employer associations.

Separate from the reform debate, a funding freeze for the Central Innovation Programme for Small and Medium-Sized Enterprises (ZIM) has stirred further anger. The government imposed the stop on 7 July, and according to the BDI’s deputy chief, Holger Lösch, it sends “the wrong signal for Germany as an innovation location.” The German Chamber of Commerce and Industry (DIHK) is demanding the freeze be reversed. New applications are not expected to be accepted before early 2027.

Economists remain divided over the overall impact. Researchers at the Ifo Institute praise the labour-market flexibility but lament the absence of a long-term strategy for cutting subsidies. Colleagues at the Institute for Macroeconomics and Business Cycle Research (IMK) strike a far more alarmist tone: they warn the pension reform, in its current form, could destroy up to 250,000 jobs and see no measurable growth effects.

The federal budget for the current year stands at €555 billion, with critics pointing to an increasing reliance on borrowing to finance the spending. The government, for its part, insists its growth forecasts are realistic, despite the gathering headwinds.