German reforms: Hoping for Christmas

Date: 13/12/03

Why the government's reform plans remain in jeopardy

CAN Germany reform? The next few days may provide an answer - and decide whether the country is in for a long, inexorable decline. Tortuous negotiations between the Social Democrat-led government and the Christian Democratic opposition over the “Agenda 2010” reforms dragged on this week; a deadline of December 11th brought no result.

It is a change from the enthusiasm earlier this year. Gerhard Schröder, the chancellor, seemed at last to accept the case for change. He announced a set of reforms that he called Agenda 2010. The opposition Christian Democrats signalled that they would not stand in the way. Angela Merkel, the party boss, knew that, when her predecessor Helmut Kohl was in power, his reforms were blocked by the Social Democratic opposition. She said she did not want Germany to “hit the wall”.

If the country is nevertheless now on a collision course, that is thanks mainly to its federal system. The opposition has a de facto veto over most government policies, because - as has been the case in most recent years - it controls the Bundesrat, Germany's upper house. The Bundesrat is not an assembly of elected politicians, like the American Senate, but of appointed representatives from the governments of Germany's states, the Lander.

All political eyes are on the Vermittlungsausschuss, the joint reconciliation committee of the Bundesrat and the Bundestag, the elected lower house. Although the committee, made up of the premiers of the 16 Lander plus 16 Bundestag members, split equally between government and opposition, meets in secret to make negotiating easier, the newspapers are full of the latest developments in the “darkroom”, as the committee's conference room is called.

The negotiations are an equation with many variables. A large chunk of Agenda 2010's 2,800 pages, which include everything from less protection from dismissal to giving municipalities more money and deregulating craft trades, must be passed before Christmas if one central element is to be implemented on January 1st: the advancing of tax cuts originally scheduled for 2005. As if this were not enough, the opposition has added items to the agenda. It will accept the tax cuts only if no more than a quarter of their €15 billion ($18 billion) cost is financed by new debt, if it is made even easier to fire people and if local exceptions from national collective wage agreements are legalised.

Some of these demands are designed to put Mr Schröder between a rock and a hard place, notably the attempt to weaken central wage agreements. If he yields on this to save Agenda 2010, Social Democrats, many of them union members, could yet stage a rebellion in the full Bundestag, which must, like the Bundesrat, approve any deal that is reached by the negotiating committee.

Matters are further complicated by the play of special interests. Some Lander do not want to do away with tax breaks for commuters, for instance, because their people tend to drive a long way to work. Roland Koch and Edmund Stoiber, premiers of Hesse and Bavaria respectively, are also partly motivated by hopes that one of them, not Mrs Merkel, will be the next opposition candidate for chancellor.

An eventual compromise is still more likely than not. Pressure on the opposition to fulfil Mrs Merkel's promise by striking a deal is mounting. Business wants something, even if it considers Agenda 2010 as a whole too timid. Bild, Germany's biggest tabloid, is waging a campaign for tax cuts. If the negotiations fail and the economy stumbles, the blame might be laid on the Christian Democrats.

The key leaders, including Mr Schröder and Mrs Merkel, are likely to hold a summit early next week to hammer out an agreement that includes the advancing of tax cuts, but also shaves subsidies and makes it easier to fire people. Germany's neighbours certainly hope for this, for their economic fortunes rest on a German recovery. Without a seasonal gift of Agenda 2010, Germany could become the grinch that stole Europe's Christmas.

• Primary Source