MNI INTERVIEW: Summer Last Chance For German Reforms - Wambach

Germany’s government has a last chance to make good on promises to address the country’s loss of competitiveness in the summer, when it should act on recommendations from special commissions for major tax and welfare reforms, the head of the ZEW - Leibniz Centre for European Economic Research told MNI.

“I’m hopeful that these will recognise that Germany’s high labour costs have reduced its competitiveness, and make important policy proposals as a result. It really could be a summer of reforms that leads to some big steps forward. If not, then in five to 10 years’ time we will run into a brick wall with our expenditure,” Achim Wambach said in an interview. “If the government doesn’t act by the summer, they really will have failed to make good on the promises they made.”

A special commission into Germany's statutory health ​insurance system has already recommended tighter controls on treatment expenditure as well as higher taxes on unhealthy food items, while other commissions on social costs and the pension system should announce findings after June.

“If the coalition partners can come up with a good compromise - and this crisis has created a window for doing so - then we could see some very positive reforms,” Wambach said. “Even if there is still uncertainty, and even if some companies are shifting production to the United States or postponing investment in Germany, the mood may change for the better after the summer.”

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Previous measures such as tax reductions to gastronomy and additional pension payments to mothers only allotted money to specific groups without productivity-enhancing effects, Wambach said. (See MNI INTERVIEW: Germany Must Cut Red Tape To Compete - Advisor)

Government stimulus measures including a EUR500 billion infrastructure and defence boost account for around half of the 0.6% GDP growth foreseen for this year in the Spring Joint Economic Forecast published by Germany’s top economics institutes in April, with the figure also pushed higher by fewer bank holidays, he noted.

There are some positive notes, with Germany’s Ministry for Digitalisation and State Modernisation likely to help reduce business costs over time, and the European Commission’s Omnibus package easing regulatory burdens for some companies, together with new EU agreements with South America’s Mercosur and with India.

“The world is more than just China and the United States, which together account for around 20% of Germany’s exports. Of the remaining 80%, more than half goes to Europe," Wambach said. “We know that companies are already restructuring themselves to be less reliant on exports to the U.S. and China. So there are ample opportunities for trade.”

German inflation has risen, and was seen averaging 2.8% in 2026 and 2.9% in 2027 in the joint forecast, but companies may for a while be prepared to absorb a greater share of higher costs than in 2022’s Russian gas crisis, Wambach said. Easier labour markets are also translating into reduced worker pay power, he noted. (See CORRECTS-MNI INTERVIEW: German Firms Up Prices More Quickly)