Kohl cuts spending in EMU bid

Date: 02/05/1996

By Thomas Klau

GERMANY's coaIition government has agreed on social and other spending cuts worth up to 37 billion ecu in a triple bid to boost employment, slash the budget deficit and secure the start of monetary union in 1999.

Mirroring similar efforts in other EU member states such as Austria, Belgium and France, Chancellor Helmut Kohl's announcement of the proposed measures in parliament last week followed the failure of a high-profile attempt to secure both the employers' and the unions' agreement to the comprehensive package.

The German unions' refusal to support the measures, which include an attempt to facilitate the hiring and firing of employees by small companies, sent a negative signal to the round table held in Brussels this week as part of Commission President Jacques Santer's efforts to create a 'confidence pact' for employment.

The union's No also raised a threat to the package as a whole, as some of measures contained in it will have to be endorsed by the Bundesrat, the German parliament's upper house which is controlled by the opposition Sozialdemokratische Partei Deutschlands (SPD).

Union leaders rushed to threaten the government with strikes against moves such as the decision to reduce guaranteed long-term sick pay by 20&percent; and freeze public sector pay.

The detail of the planned cuts in the federal budget, amounting to a total of 13.3 billion ecu, will be partly laid down in July in the draft 1997 budget, with the defence department destined to bear the brunt of the spending slashes.

A 6.5-billion-ecu reduction in pension fund costs is to be achieved through an array of 30 individual measures, including an increase in the retirement age for women from 60 to 63 from next year and a cut in pensions for ethnic German immigrants from Central and Eastern Europe and the former Soviet Union.

The success of the coalition's recipe for giving Germany's sluggish economy a much-needed confidence boost will be crucial if Bonn is to lower its budgetary deficit enough to satisfy the Maastricht Treaty's fiscal convergence criteria, which set a maximum deficit of just above 3.0&percent; in 1997 for countries participating in monetary union.

Yet many observers expect at least some proposals to be watered down because of the need to get agreement from the Länder governments and fight off massive labour unrest.

Reflecting the economy's disappointing performance so far this year, Germany's five leading economic institutes have lowered their growth forecast for 1996 to a meagre 0.75&percent;.

They continue, however, to predict an imminent recovery and forecast growth of 2.5&percent; for 1997.

In the face of lower-than-expected tax revenue and spiralling unemployment payments, even government economists privately acknowledge that Germany might well miss the 3&percent; convergence target, particularly if the economy fails to revive at the expected speed.

A budgetary deficit of around 3.5&percent; of the GDP in 1997 would, however, leave the German government with an unpalatable choice between either postponing monetary union or agreeing to a looser interpretation of the Maastricht criteria, a move fiercely opposed by the powerful Bundesbank and other leading German institutions.

Speaking privately, Chancellor Kohl has indicated his preference for postponement of monetary union by a year or two if prolonged economic stagnation were to counteract the government's deficit-cutting efforts.

But others, such as Belgium's Prime Minister Jean-Luc Dehaene, have publicly warned against such a move, which they say might lead to an indefinite postponement of the EMU project, with potentially disastrous consequences for the cohesion of the single market.

Meanwhile, a Belgian jobs pact between government, employers and the unions, forged by Dehaene along the same lines as the Kohl proposals rejected by the German labour organisations, suffered a similar fate this week.

One of Belgium's two largest unions, the Socialist ABVV/FTGB, refused to endorse the government-sponsored pact, demanding more job guarantees in exchange for wage restraint. Employers' organisations immediately answered by ruling out fresh negotiations.

However, the Belgian coalition government indicated it would push through new austerity measures in parliament, should its jobs pact be definitely rejected.