The first signs of Germany’s austerity era
With industry weakening and spending rising, the government is starting to pass costs on to the public.
Dear Reader,
Here’s the big picture.
German companies are losing market share across the world as importers turn to cheaper Chinese products that appear to meet the same standards. After peaking in 2018, the value of German exports has been declining ever since. As profits fall, so too does the tax revenue the state can extract from them. At the same time, these same companies are pressing the federal government to reduce their tax burden so they can compete on price again.
That would be easier to grant if the state did not need the money so badly.
On one side, there is the return of great-power conflict. A revanchist Russia has forced Germany to dramatically increase defence spending in an effort to prevent the war in eastern Europe from spreading beyond Ukraine. On the other, an ageing population is driving up the cost of pensions and healthcare, placing ever greater demands on the public purse.
This leaves the government with an unenviable set of options. Raise the burden on the private sector and risk accelerating the decline of German industry? Take on more debt and push the problem into the future, at potentially higher cost? Or cut welfare spending and risk alienating the elderly voters who form the last reliable base of Friedrich Merz’s CDU and his junior coalition partner, the Social Democrats?
This conundrum broke the last government — and it seems to be straining the current one to breaking point, too.
Earlier this month, when Merz convened his cabinet at a villa on the outskirts of Berlin to agree on measures to revive the economy, the talks reportedly ended in a shouting match. After hours of discussion failed to produce a breakthrough, Merz is said to have lashed out at his finance minister, Lars Klingbeil of the SPD.
The underlying conflict is familiar. The CDU wants to reduce costs for companies — including by loosening labour protections and cutting taxes — in the hope of restoring competitiveness. The SPD, meanwhile, is focused on preserving workers’ rights and the welfare state, and is more willing to countenance higher borrowing.
Merz had hoped to present the outlines of a major reform package this month — having already promised an “autumn of reforms” last year that never materialised. Instead, the failure to reach agreement has left him with far more limited measures, such as a temporary cut to fuel taxes to offset the impact of the blockade of the Strait of Hormuz.
The first obituaries for his government are already being written. Barely a year after taking office, lawmakers within the coalition are openly questioning whether it will last.
And yet, for all the political paralysis, the first signs of a reform agenda are beginning to appear. Under pressure, the government is starting — slowly — to shift costs.
First up is healthcare.
The cabinet agreed this morning to changes in how the system is financed that are expected to save €17 billion a year. Germany has the most expensive healthcare system in Europe, but far from the best, and reform has long been overdue. For now, however, the government is not attempting a full overhaul. Its more immediate goal is to stop costs from spiralling.
Without intervention, the gap between contributions and spending — driven by an ageing population and a shrinking base of contributors — was projected to reach €40 billion by the end of the decade.
Those costs would ultimately have fallen not only on workers, but also on employers, who cover half of their employees’ health insurance contributions — further eroding the competitiveness of German industry.
The reforms now on the table reflect the limits of what is politically feasible. Some services will be cut. More importantly, the burden will shift — away from employers and onto the individual.
Under the draft bill, statutory insurers will no longer be required to cover certain preventative screenings, such as those for skin cancer, nor will they reimburse homeopathic treatments. Both, health minister Nina Warken has argued, lack evidence of improving outcomes.
The more consequential changes, however, lie elsewhere: higher out-of-pocket payments for prescribed medicines; lower sick pay; restrictions on free co-insurance of non-working spouses; and increased contributions from higher earners. Warken has been careful to stress that the people who will bear the largest costs are those who either earn more or who choose not to participate in the job market.
At the same time, parts of the system that drive costs will be restrained. Payments to doctors and hospitals — long shaped by a byzantine, service-based compensation model — are to be capped. Physicians, who are largely self-employed, bill insurers for each treatment they provide, a system critics say incentivises volume over necessity. Medical associations have warned that cutting these payments will lead to worse service for patients.
Critics argue that the reforms place a disproportionate burden on those in the statutory system, while leaving private insurance — accessible mainly to higher earners, the self-employed, and the cloistered Beamtenschicht (teachers and state administrators) — comparatively untouched. Doctors treat privately insured patients preferentially, as they receive higher compensation for doing so.
The legislation, which still has to pass through the Bundestag, is based largely on recommendations from a commission that delivered its proposals only a month ago. Warken has pointed to the speed of implementation as proof that the current government is capable of delivering on its promise of reform.
This is also the first reform the broader public will notice, either in its pocket or in overcrowded waiting rooms. It will be the first test of whether the coalition can get the balance right in spreading the costs while minimising the damage to services. So far, the anger appears to have been confined mainly to doctors’ associations. The public might not be delighted to be paying more for healthcare, but there is little evidence yet that this has the potential to be Merz’s Heizungsgesetz.