Germany’s reform package: Make or break – or muddle and sludge?

Date: 22/03/03

The German chancellor's latest proposals offer hope - if they are built on

HERALDED as his most important offering since he undeservedly squeaked back into office last autumn, the economic-reform package unveiled last week by Germany's battered chancellor, Gerhard Schröder, should - if boldly and fully implemented - push his country in the right direction. Mr Schröder sounded at last like a man who truly acknowledges that his country is in deep trouble and that something drastic must be done. He may even realise that he may have to inflict the sort of drastic course of medication and even surgery that would make the patient scream in agony before embarking on the road to complete recovery. But it is still not certain whether Mr Schröder, who has a patchy record in fulfilling promises and taking unpopular decisions, has the guts to do it. Much will depend, in the next six months or so, on his courage and skill in turning his proposals into substance, and keeping up the momentum to build on them.

That the patient is dangerously ill is no longer in doubt. Many of Mr Schröder's fellow Social Democrats still blame the lingering burden of Germany's reunification of its eastern and western parts and the global downturn for the bulk of their country's troubles. They still hope against hope that good health will return without the sort of butchery that is plainly needed, whatever the state of the rest of the world. But Germany has the slowest growth - a pathetic 0.2% last year - of the 12 countries in the euro-zone. It has one of the highest unemployment rates - 11.3%, or 4.7m people, by the latest unadjusted measure - in the rich world. The number of bankruptcies has broken all post-war records. The Mittelstand of mainly family owned small-to-medium-sized companies, long admired as the backbone of Germany's economy, is in dire straits. Germany's stockmarket slump, over the past few years, has been spectacular even in comparison with elsewhere. Many of the country's biggest banks are floundering.

Against this gloomy backdrop, the chancellor has taken some undoubtedly courageous steps. Most strikingly, and to the consternation of the trade unions, he has proposed swingeing cuts in the duration and amounts of unemployment benefit that go beyond what was proposed last summer by Peter Hartz, a Volkswagen manager, whose government-appointed commission made a slew of recommendations intended to address some of the most patent failings of Germany's labour market. The chancellor has also suggested ways that would, in effect, weaken job-protection in small companies and encourage employers to hire new workers. He says he will encourage wage bargaining at company level rather than within the present suffocating straitjacket of nationwide deals. He also intends to break the closed shop for skilled craftsmen which makes services more expensive. Above all, he says he is determined to reduce the non-wage costs of labour, which now add 42% to employers' wage bills. And he promises to tackle pensions and health care.

All this, on the face of things, is splendid news. But the caveats are enormous. It would be unfair to say that Mr Schröder is merely tinkering. The trade unions' squeals suggest he is doing a lot more than that. But it is fair to say that the proposals mark only a start - and that much depends on whether Mr Schröder can build them into a coherent new strategy that plainly signals that Germany is moving away from the cosseting and consensual fudge of the past to a harder-edged society that can thrive in an unforgiving global market.

He could go either way

Many of the proposals could yet be tweaked in the wrong direction. Mr Schröder needs the co-operation of the opposition on the right, which controls the Bundesrat, Germany's upper house of parliament. In particular, he has refused to attack the fundamentals of job-protection legislation that make it so hard for employers to hire and fire as the business cycle goes up and down. Nor has he spelt out legislation to make wage bargaining more flexible. So far, his proposals to reduce non-wage costs would nibble at them, not bite out chunks. On health care and pensions, Mr Schröder has yet to present more than a blurry outline of promised plans to come.

In sum, Mr Schröder's reforms are piecemeal. They could yet be watered down - or beefed up, as they would have to be if they are to give the German patient a chance of recovery. To date, and not just on economic matters, Mr Schröder's record suggests he is an artful opportunist who backs down when the going gets rough. Now is his chance to prove the doubters wrong. For Germany's - and Europe's - sake, hope he does.

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