German reforms: Sick man walking

Date: 20/12/03

Germany needs a lot more reforms than those in this week's modest deal

THEY may no longer lead in most areas, but Germans are world class in one: seeing the glass as half-empty, not half-full. In the small hours of December 15th, the Social Democrat-led government and the Christian Democratic opposition at last agreed to reforms (the so-called Agenda 2010) that may be the most ambitious seen in post-war Germany. Yet the media were full of phrases such as “reformlet”, “half-baked” and “a small step”.

Germany's leaders could have done better. They cut the cost of tax cuts next year to €15 billion ($18 billion), down from €22.3 billion, because the opposition insisted that only part should be financed by new debt. The Christian Democrats also did not want to slash subsidies too radically. Instead, a chunk of the tax cuts will be financed by loans against future privatisations. Because asset sales are one-off, that will make it harder for Germany to get below the ceiling on borrowing in 2005 set by the euro area's stability pact.

The labour-market reforms, on the other hand, came out of the negotiations somewhat strengthened, although the government fought off opposition pressure to permit more exceptions to industry-wide wage agreements. Strict rules against firing will be dropped for new hires in companies with up to ten employees, and not merely five, as the government had proposed. The long-term unemployed will have to accept jobs that pay less than union wages, or lose their benefits. It is this part of the deal that a number of Social Democrats may refuse to back when it comes to a final vote in parliament on December 19th (although, with opposition support, the deal is sure to go through).

Taken together, however, the revised Agenda 2010 reforms are unlikely to give Germany's economy much of a boost in the short term - which is bad news for the chancellor, Gerhard Schröder. His political fortunes depend greatly on getting higher growth (predicted to be a meagre 1.5-1.7% next year) and lower unemployment (currently 4.4m, or 10.5% of the workforce). If he fails, his government risks remaining in a state of perpetual crisis until the next general election in 2006, which it may well lose: lower tax revenues, higher budget deficits, dismal state election results.

Mr Schröder seems to sense that he must do more than just wait for things to get better. He has called the reform deal nothing more than a “stopover” and vowed to start an “innovation offensive” next year, albeit without providing any details. What needs innovation most is Germany's hellishly complicated tax system, as well as the country's unsustainable health-care finances. Only more far-reaching reforms can justify the government's favoured catchphrase of the moment: “Germany is on the move.”

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