Playing poohsticks in the Styx

Posted by Dan Mitchell

https://danieljmitchell.wordpress.com/2026/07/10/germany-needs-milei-ism-but-is-getting-romney-ism/

http://danieljmitchell.wordpress.com/?p=94085

In the past year, I’ve written about Germany’s fiscal deterioration and its costly fixation on net-zero environmentalism.

As illustrated by the chart, these policies have contributed to malaise and economic stagnation (and were caused by – or contributed to – eroding societal capital).

The good news is that Friedrich Merz, the country’s chancellor, wants economic reform.

The bad news is that his proposed reforms are very timid. Here are some excerpts from a column in the Wall Street Journal by Joseph Sternberg.

Chancellor Friedrich Merz last week unveiled another series of economic reforms. …You can argue the plan is small beer relative to the scale of Germany’s challenges. The economy is barely growing after adjusting for inflation, and industrial production is falling off a cliff. …The trouble is that Mr. Merz keeps hitting political opposition that makes it impossible to go far enough. The labor-market element of last week’s proposal is a case in point. Germany, like most of Europe, desperately needs laws that allow companies to hire and fire easily. Mr. Merz proposes removing legal protections for some workers so they can be fired at will with severance pay. But this is limited to employees earning more than about €175,000, and is aimed mainly at tech start-ups. …As for taxes, the reform plan is a mess. Mr. Merz and Finance Minister Lars Klingbeil, a Social Democrat, say their changes will leave an additional €600 a year in the pocket of a middle-class double-earner family. …Yet in the first sign of trouble, this is offset by tax increases on incomes above €250,000. And many households (single or married) earning more than about €78,000 will see their disposable income decline following the reform… Worst of all is what Mr. Merz left out. Germany’s deranged net-zero climate policies remain so deeply entrenched in the country’s political psyche that they’re all but omitted from last week’s reform package. Were Berlin to abandon this nonsense, the elimination of climate mandates would stimulate a revenue-swelling industrial boom while easing the burden subsidies impose on the fisc.

Here are some passages from a Reuters report by Andreas Rinke and Miranda Murray.

German Chancellor Friedrich Merz’s coalition unveiled a package of reforms…, including tax relief for lower-income families and far-reaching pension ​reforms in a bid to revive growth and competitiveness in Europe’s largest economy. …They aim to make life easier for companies, with promises to cut red tape, allow employers more scope to hire workers on short-term contracts and make it harder for them to call in sick. While winning praise from some employers, the measures were also variously criticised as unfair or unworkable, or not going far enough. …The tax relief will be mainly funded by raising the top rate of tax to 47% from 45% for the ​highest earners with an annual income of €280,000 or more. …On pensions, a commission appointed by ​Merz last month has suggested a Swedish-style pension fund and a gradual increase in the retirement age to help stabilise the country’s pension system as ​the population ages.

What do I think about Merz’s proposed reforms? At best, I’m underwhelmed.

Germany (like other European nations) needs Milei-ism. Instead, it’s getting Mitt Romney-style milquetoast.

Here’s my two cents:

• At the risk of understatement, raising the top tax rate is not a recipe for economic growth.
• And while I like Sweden’s pension reforms, Germany should allow workers to fund personal accounts by diverting their payroll taxes.
• Reforming labor law is a good idea, though Merz is mostly tinkering with the current system.
• Given the damage they’ve done to manufacturing, failure to fix extremist environmental policies is a horrible oversight.

Let’s close today’s column with three tweets that highlight major problems with public policy in Germany.

Here’s a look at the tragic rise of spending on the welfare state, with most of the damage occurring before 1980 and gradual deterioration ever since.

Next, we can review how bureaucracy has expanded and entrepreneurship has declined.

Last but not least, here’s the German version of the dependency trap.

None of the tweets include sources, so I don’t know if they are all 100-percent accurate.

If the last one is close to true, Germany is in deep trouble since the data is even worse than it is in the United States or United Kingdom.

P.S. Unsurprisingly, the IMF wants policy to get worse in Germany.

P.P.S. While today’s column is critical of Germany, there are some positive things to say about the economic history of West Germany.

P. P.P.S. But I can’t resist pointing out that the Germans go overboard with regards to taxation (see here, here, here, here, and here).

https://danieljmitchell.wordpress.com/2026/07/10/germany-needs-milei-ism-but-is-getting-romney-ism/

http://danieljmitchell.wordpress.com/?p=94085