Economists urge Chancellor Merz not to roll back reforms — The Local Germany

In Germany, economic institutes have urged Chancellor Friedrich Merz's coalition not to abandon planned reforms following the Christian Democratic Union's losses in three state elections this month. As The Local Germany reports, the voting results, which significantly strengthened the far-right Alternative for Germany, triggered a discussion about a possible softening of the reforms.

Warning for the government

Key representatives of the governing coalition had already allowed for a revision of the package of decisions agreed by the CDU and the Social Democratic Party after difficult negotiations. The reforms cover tax, social and pension policy. Particularly controversial were plans to gradually raise the retirement age above 67, as well as proposed changes to the public healthcare system.

Stefan Kooths, an economist at the Kiel Institute for the World Economy, said investors are concerned by a situation in which reform packages are announced, presented and then postponed again. According to him, people refrain from making economic decisions because of uncertainty over future conditions. Kooths believes that unclear economic policy is one of the factors behind the prolonged weakness of Europe's largest economy.

Oliver Holtemöller, a representative of the IWH institute, also noted that Germany lacks confidence in the country's economic course, and this is an important factor in making economic decisions.

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Growth forecast raised

The DIW, RWI, Ifo, IWH and IfW institutes more than doubled their forecast for Germany's gross domestic product growth in 2026, from 0.6% in April to 1.3%. The forecast for 2027 was also slightly improved, to 1.1%.

According to the institutes' assessment, Germany's economy performed better than expected in the first half of the year thanks to a resilient global economy and the global artificial intelligence boom. At the same time, they warned that the recovery is largely supported by higher government spending on defense and infrastructure, causing debt levels to rise sharply. Economists stressed the need for fiscal consolidation.

A separate Ifo survey showed that Germany's business climate index rose by 1.1 points in September to 89.9 points, while analysts had expected an increase of only 0.1 points.