San Francisco Frontiers - German coalition agrees on reform package in key breakthrough

"We are working to increase the flexibility of our businesses," Merz told a Berlin press conference after lengthy talks between his centre-right CDU party and their coalition partners the centre-left SPD.

"We are working to cut red tape. We are working to protect our welfare state, and we are working to ease the burden on employees and companies by lowering taxes," said Merz while presenting the "Programme for Revival and Employment".

The package includes income tax cuts worth 10 billion euros ($11.4bn), to be financed by higher taxes on the wealthy, as well as changes to the pension system that will eventually see the retirement age rise to 67.

"The highest earners in this country will therefore take on a larger share" of the tax burden, said Finance Minister and Vice Chancellor Lars Klingbeil of the SPD.

"That is fair, so that our country can move forward."

The tax relief would mean an average family is about 600 euros better off per year, the parties said.

The coalition also agreed to reduce corporate reporting obligations that have burdened companies, and to scrap the right of employees to get a sick note by telephone with the aim of reducing the high number of sick days in Germany.

- 'Under pressure' -

The coalition parties -- in power since May last year in Europe's biggest economy -- had been struggling for months to agree on a series of thorny issues.

The government is also keen to show it can get to grips with the country's problems and to diminish the appeal of the far-right Alternative for Germany (AfD), which has been topping national opinion polls for months.

Key regional elections will be held in September in AfD strongholds in formerly communist eastern Germany, which could produce the first-ever AfD-led state government.

That would be unprecedented in post-war Germany and would underline Merz's dire approval ratings.

"We are doing everything we can to overcome our country's structural weakness when it comes to economic growth," Merz said.

"We are under pressure from many sides," he admitted.

Germany's export-led industry was long the engine of its economic success but has been hit hard in recent years by rising energy and labour costs as well as cumbersome bureaucracy.

Tough Chinese competition and US President Donald Trump's erratic tariff blitz have only heightened the pressure.

Marion Muehlberger, senior economist at Deutsche Bank, said Thursday's announcement represented "one of (Germany's) biggest reform packages in decades" and showed the government's "ability to agree on important structural reforms".

She said that the package "should bode well for sentiment and dovetails with our forecast that growth will pick up in the second half of the year".

W.Thompson--SFF