BERLIN, Sept 4 (Reuters) – When German Chancellor Friedrich Merz assumed office in May, he brought with him a sweeping 500-billion-euro infrastructure initiative and a promise to rejuvenate Europe’s largest economy through bold reforms. However, growing skepticism is emerging among economists, investors, and business leaders over the pace and depth of these changes. n nWhile the financial injection was expected to take time to yield results, many now believe the structural adjustments are lagging behind initial expectations. Salomon Fiedler, an economist at Berenberg, emphasized that meaningful increases in long-term growth potential require more aggressive policy shifts, particularly in areas such as energy efficiency, taxation, and regulatory burdens. n nPublic sentiment reflects this unease: a recent Forsa survey revealed that 61% of Germans anticipate worsening economic conditions in the coming years, up from 50% in May. This rising pessimism could amplify support for the far-right AfD party, which has gained traction in national polling amid perceptions of governmental inefficacy. n nThe urgency for reform intensified in August when unemployment in Germany climbed to three million—the highest in ten years. One factor behind the sluggish progress may be coalition dynamics. Although Merz, a staunch conservative, advocates for pro-market policies, his coalition partners, the center-left Social Democrats (SPD), are cautious about changes that might undermine labor protections. n nCriticism has mounted over SPD Labor Minister Baerbel Bas’s decision to establish a commission to review unemployment benefits and work incentives, with implementation not expected before year-end and followed by lengthy parliamentary debates. Rainer Dulger, head of the BDA employers’ association, warned against hiding behind bureaucratic delays and diluting essential decisions. n nMerz’s administration pledged several key measures, including reduced energy prices, tax relief for businesses and lower- to middle-income households, and the elimination of a controversial supply chain due diligence law. Yet implementation has fallen short. Instead of repealing the law, the cabinet opted for amendments—retaining much of its framework. Budgetary limits have also led to partial reductions in power-grid fees and selective cuts to electricity taxes, rather than universal relief. n nThe HDE retail association criticized the government for breaking its commitment to broad electricity tax reductions, arguing it undermines trust among consumers and retailers. n nDespite these setbacks, there are signs of cautious optimism. A key business sentiment index rose in August to its highest level in 15 months, though analysts note this is largely driven by future expectations rather than current performance, which has deteriorated. Berenberg’s Fiedler noted that major spending from the new infrastructure fund won’t begin until late this year, with significant impacts expected from 2026 onward. n nEconomists have welcomed certain initiatives, such as the investment booster introduced in June—which includes improved depreciation rules for firms—alongside increased defense spending and planned corporate tax reductions. However, only 25% of 170 economists surveyed by Ifo rated the government’s economic strategy positively, while 42% expressed outright disapproval, citing the absence of a coherent plan to tackle systemic challenges like rising pension expenditures. n nRecent economic data paints a sobering picture. The economy contracted in the second quarter, weakening hopes for a sustained rebound. Exporters now face additional pressure from new U.S. tariffs. Industrial output in June hit its lowest point since 2020, weighed down by soft international demand and intensified competition from China. According to an EY report, Germany has lost 245,500 manufacturing jobs since 2019. n nInvestor confidence also declined more than anticipated in August, fueled by dissatisfaction with the EU-U.S. trade agreement. n nFranziska Palmas, senior Europe economist at Capital Economics, acknowledged that the coalition has managed to pass budgets for 2024 and 2025, indicating some level of cooperation between conservatives and the SPD. However, she questioned whether rapid reform would remain a practical priority. n nOngoing disputes over tax policy, welfare adjustments, and proposals to restore mandatory military service suggest Merz may struggle to deliver transformative change, much like his predecessor Olaf Scholz. Mujtaba Rahman, Eurasia Group’s managing director for Europe, observed that ideological divides within the coalition are likely to constrain both unity and substantive reform, despite Merz’s declared “autumn of reform.” n nReporting by Maria Martinez; editing by Mark John and Toby Chopra
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Merz’s economic promises suffer reality check
BERLIN, Sept 4 (Reuters) – Propelled by a 500-billion-euro spending surge and with a clutch of reforms in hand, German Chancellor Friedrich Merz took office in May promising to deliver on a pledge that his predecessors failed to keep: reviving growth in Europe ‘s largest economy. n nBut while it was clear that the spending would take time to benefit the economy, there is a growing sense among economists, investors and business groups that the promised reforms are slower and less far-reaching than initially expected. n nSign up here. n n”If the government wants to increase the underlying potential growth rate durably and notably, it needs to implement much more ambitious structural reforms,” said Salomon Fiedler, economist at Berenberg, citing the need to address issues such as an inefficient energy sector, high taxes and regulation. n nOrdinary voters are unhappy too: A Forsa poll showed last week that 61% of Germans expect economic conditions in Germany to deteriorate in the coming years, up from 50% in May. n nFailure to deliver on economic pledges could deepen public frustration and feed perceptions of ineffectiveness — creating fertile ground for the far-right AfD party, which has begun to top some national polls. n nThe reform urgency was underlined in August as German unemployment hit three million for the first time in a decade. n nOne reason for the limited progress may be the reality of coalition. While arch-conservative Merz has long-championed a pro-business agenda, his partners the centre-left Social Democrats (SPD) are more hesitant about reforms that could weaken workers ‘ rights. n nCritics say SPD Labour Minister Baerbel Bas ‘ launch of a commission to propose changes to jobless benefits and work incentives by year-end – to be followed by months of parliament debates – is just too slow. n n”The government must not hide behind commissions and keep postponing, dragging out and watering down necessary decisions,” said Rainer Dulger, head of the BDA employers ‘ association. n nAlongside the headline-grabbing ‘fiscal bazooka ‘ to fund infrastructure spending, Merz ‘s coalition government promised lower energy prices, tax cuts for businesses and middle- and lower-income households, and scrapping a disputed law requiring businesses to do due diligence on their entire supply chain. n nBut delivery is falling short, fuelling impatience. n nOn Wednesday, the cabinet approved changes to the supply chain law – criticised as costly and bureaucratic – instead of scrapping it as pledged. n nSimilarly, budget constraints mean power-grid fees will be cut by less than promised, and the electricity tax will be lowered for specific sectors but not all consumers. n n”By breaking its promise to cut electricity taxes for everyone, the German government is squandering the trust of retailers and consumers,” the HDE trade association said. n nHOPES UP n nIronically, since the new government took office, one measure of German business sentiment has trended up, reaching a 15-month high in August although still well below its historical average. n nYet analysts point out it is being buoyed by the component of the index built around hopes for the future, while the reading on current conditions actually worsened. n n”This fits with the view that it will take some more time for the economic rebound to get under way,” said Berenberg ‘s Fiedler, noting that new government spending will not get going before the end of this year and then ramp up from 2026. n nEconomists welcome the 500-billion-euro infrastructure fund and an “investment booster” approved in June – a package of measures such as better depreciation options for companies – plus extra defence spending and a planned cut in corporation tax. n nBut overall, only a quarter of 170 economists surveyed by Ifo gave the government ‘s economic measures a positive rating, with 42% of them outright negative, criticising the lack of a plan to address deep-rooted issues like rising pension costs. n nA summer run of weak data has given a sobering view of the government ‘s progress. The economy contracted in the second quarter, further dimming expectations of a sustained recovery, and exporters must now face the impact of new U.S. tariffs. n nIndustrial output fell in June to its lowest since 2020 amid weak foreign demand and rising Chinese competition. An EY study shows Germany has lost 245,500 industrial jobs since 2019. n nGerman investor morale also fell more than expected in August, amid widespread disappointment with the European Union-U.S. trade deal. n nThe fact that Merz ‘s coalition has at least been able to pass budgets for this year and next is a sign that his conservatives can work with the Social Democrats to get policies over the line, said Franziska Palmas, senior Europe economist at Capital Economics. n n”But it still remains to be seen whether quick reform will be a priority in practice,” she said. n nA string of rows on other issues ranging from tax and welfare reform to reinstating mandatory military service has convinced some that Merz, like his predecessor Olaf Scholz, will struggle to produce substantial reforms. n n“While Chancellor Friedrich Merz has announced ‘an autumn of reform ‘, I suspect that ideological differences will continue to limit coalition cohesion and meaningful reform,” said Mujtaba Rahman, managing director for Europe at Eurasia Group. n nReporting by Maria Martinez; editing by Mark John and Toby Chopra