Europe Economic Weekly: It’s not 2022, let’s hope it’s not 2011

Research evidence excerpt

Europe Economic Weekly: It’s not 2022, let’s hope it’s not 2011

bureaucracy simply by aligning national with EU regulations (rather than having both and

hence a particularly complex and in parts constraining feature) turn on very many screws

in a bid to enhance productivity, domestic demand and increase labour market potential.

Cautiously less pessimistic from 2028 onwards

It’s not a done deal, and in typical German fashion, changes may not be for immediate

consumption. The legislative procedures will take time, many measures (the pension

reform or the income tax reform) are planned to come into effect in 2028. Until full

effects show, the wait may even be longer, if (big if) all gets passed as currently planned.

It is also an uphill struggle: the reforms are unlikely to suffice to fully offset the secular

decline in Germany’s auto industry, or demographic change. Competing with China’s

export model, at this stage, seems extra tough. But the plan could help to mitigate some

of the particularly acute drags on the economy. The impact could have been more

forceful had it come earlier: the blend of big fiscal spending from 2025 innovations (if

spent more optimally) paired with structural reforms may have worked better together

than the sequence now proposed. But bygones are bygones, and reforms now are

arguably the next best outcome compared to the status quo.

Don’t draw big market/asset allocation conclusions on the new pension pots yet

One additional point on the pension reform: the few questions we received were on the

potential for the new mandatory capital backed pension scheme to impact the market.

From 2028, pension contributions by employers and employees will rise by 0.5% per year

to 2% by 2032, to build a capital backed pension contribution to the Pay-As-You-Go