Germany's Coalition Faces Fracture Over Sweeping Social and Labor Reforms

Tensions inside the German coalition government are escalating ahead of a crucial meeting in the Chancellery. The CDU-affiliated Economic Council has thrown a series of controversial proposals into the ring, targeting dismissal protection, working time rules, tax relief, and pensions — and the SPD is pushing back hard.

At the heart of the labour dispute is a plan to loosen dismissal protection for a specific group: employees earning a gross monthly salary above €8,450. Under the proposed change, companies and workers could agree in the employment contract on a severance-payment arrangement that would replace the statutory protection against unfair dismissal. The stated aim is to make it easier for small and medium-sized enterprises to hire highly qualified staff.

The Economic Council also wants to overhaul working-time law. Instead of a daily maximum, a weekly limit would apply, granting more flexibility for both employers and employees.

These demands are part of a broader reform package that the Union parties and the SPD are currently negotiating. The talks in the Chancellery involve Friedrich Merz, Markus Söder, and Lars Klingbeil, and are seen as decisive for the direction of Germany's future economic and social policy. A draft government budget for 2027 is expected to be presented in early July.

Tax relief for lower earners — and a fight over who pays

A separate proposal from the ZEW – the Centre for European Economic Research – calls for tax relief on incomes below €50,000. Affected taxpayers could save up to €804 per year. The total cost is estimated at around €10 billion.

How to finance that sum has sparked a sharp dispute. The SPD is pushing for higher taxes on top earners, including a top rate of 45 percent or a wealth tax of up to 48 percent. The Union largely rejects any tax increases. CDU General Secretary Carsten Linnemann does not categorically rule out expanding the wealth tax, but warns that middle-class businesses and the trades would be hit hard. Instead, he proposes spending cuts of between one and three percent across all ministries.

Pension battle: retiring at 63 under threat

The pension system is another flashpoint. A government-appointed commission has proposed phasing out the so-called "Rente mit 63" — the option to retire at 63 with no deductions after 45 contribution years. Under the commission's plan, the retirement age would be linked to average life expectancy.

SPD politician Manuela Schwesig has sharply criticised the idea, demanding instead that retirement be based on the number of contribution years, not age.

Unions and the SPD left wing push back

Resistance is mounting from trade unions and the left flank of the SPD. A group of SPD parliamentarians is speaking out against longer working hours, any weakening of dismissal protection, and restrictions on the right to strike. They are countering with their own demands: a one-time wealth levy on assets exceeding €100 million, a nationwide rent cap, and price ceilings for energy and basic foodstuffs.

The DGB – Germany's umbrella trade union federation – has presented an alternative pension plan through its own commission. It proposes raising the pension level to 53 percent of average earnings in the long term, introducing a mandatory occupational pension scheme in which employers contribute a fixed percentage of gross wages, and rejecting any increase in the retirement age outright.

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