Germany’s reforms: Dreaming of an economic revival

Date: 22/03/03

Gerhard Schröder has revealed his plans. Now he must get his hands dirty

STIRRING it was not. Expectations had been whipped up so high that Gerhard Schröder's address to parliament on March 14th was almost bound to disappoint. The hope had been that the chancellor would provide a master plan to give back to the European Union's biggest and weakest economy its former leading role. He did not do that but he did announce a string of bold reforms which, in terms of the pain they are likely to cause, go further than anything proffered by any post-war chancellor. This has raised hopes that, after years of decline, sclerotic Germany may at last be heading in the right direction - if the embattled Mr Schröder can carry through his plans.

That is now the big question. Mr Schröder predicted that his speech would provoke “cries and gnashing of teeth” - and it has, particularly among the unions and the left wing of his own Social Democratic Party. His proposals for drastic restrictions in unemployment and sickness benefits have caused particular anger. Several Social Democratic backbenchers have already threatened to vote against the cuts. Despite the solid backing of its Green allies, this could cause severe difficulties for the government, which has a majority of only nine seats in the Bundestag, the lower house of parliament.

For the moment Mr Schröder is sticking to his guns. He could hardly do otherwise, having admitted (for the first time) that Germany's weak growth was as much due to structural factors as to the downturn in the world economy. Its non-wage labour costs, equal to 42% of gross wages, were “far too high”. The restructuring of its overburdened welfare state had become an “absolute necessity”. Public services would have to be cut and more “self-reliance” demanded of individuals.

In his proposed labour-market reforms, Mr Schröder goes beyond what the government commission, chaired by Peter Hartz, personnel director of Volkswagen, recommended last summer. The chancellor has announced taboo-breaking plans, not mooted by Mr Hartz, to tackle job protection, collective bargaining and the closed shop operated by the skilled craftsmen's guild. He has also returned to one of the main proposals in Mr Hartz's draft report, which had been dropped from the final report after furious opposition from the unions: to pay full unemployment benefit (60-67% of previous net wages) for a maximum of only 12 months to those under 55, instead of the present maximum of 32 months, and thereafter to pay only welfare benefits instead of the usually much higher long-term unemployment benefit.

Though Mr Schröder has bowed to union pressure to keep job protection in all companies with more than five employees, he has agreed to make the rules more flexible by letting small firms take on a sixth worker - or more - on a fixed-term contract without the other employees becoming eligible for full job protection. In larger firms, he proposes offering anyone laid off a choice between a fixed amount of compensation, not automatically available at present, and seeking redress in the courts, in which case the employee would have to renounce all rights to financial compensation. This, it is hoped, would help to avoid the long and unpredictable legal proceedings that always follow any attempt to lay off workers.

Mr Schröder also wants to make it easier for companies to opt out of sector-wide agreements when circumstances so require. At present, it is hard for a company in difficulties to offer lower rates of pay in an effort to keep the business afloat, even when the workers themselves agree. But Mr Schröder has declined to touch Mitbestimmung - the system of “co-determination” of workers and managers, whereby workers have works councils and seats on supervisory boards - which, though irksome to many managers, has helped keep Germany enviably strike-free.

Clean your own teeth

Mr Schröder's other main target for reform is Germany's overburdened and inefficient health system, which is one of the world's most expensive. Health-insurance contributions, shared equally by employer and worker, have shot up and now represent 14.4% of gross wages. Mr Schröder wants to bring that down to under 13%. Though he has rejected proposals for the removal of certain services like dentistry and sporting accidents from the state system, he has decided to require private insurance for long-term sickness benefit, hitherto paid by the public health-insurance companies, and to transfer other benefits not related to health, such as maternity grants, to taxes. He also plans to introduce a fee for every visit to a doctor.

Further proposals on restructuring the health system are likely to come when the government commission on welfare reform, chaired by Bert Rurup, reports later this spring. Mr Rurup, an economics professor, will also make recommendations on pension reform. Mr Schröder has admitted that further “adjustments” are already needed to the long-term pension reform introduced by his government only last year. Under it, government-backed private pension funds were set up for the first time to supplement the dwindling pay-as-you-go state pensions. Some 15% of workers have so far opted to contribute to the new scheme.

Mr Schröder is also planning legislation to make life easier for Germany's Mittelstand, the small and medium-sized companies that provide about three-quarters of all jobs. They will be offered big tax cuts, easier credit and simpler book-keeping procedures. New companies are to be allowed to take on workers on fixed contracts - making lay-offs easier - for up to four years instead of the usual two. Skilled craftsmen, like plumbers, decorators and hairdressers, will generally be allowed to set up on their own after ten years of work experience, without requiring an expensive and hard-to-get Meisterbrief (master diploma). And a non-master will be able to set up his own company provided that at least one employee has a Meisterbrief.

Mr Schröder's “Agenda 2010”, as he calls these proposals, is supposed to help create jobs and boost growth. But his room for manoeuvre on growth is slight, given his newly reconfirmed commitment to the EU's stability pact. Germany overshot the pact's 3% limit for the public deficit last year and is likely to exceed it again this year, particularly after the rejection last week of his tax package in the Bundesrat, the opposition-controlled upper house.

The unions and Social Democratic left-wingers have long begged Mr Schröder to boost growth with a huge public-investment programme. Local governments are now to be offered cheap loans to the tune of €7 billion ($7.3 billion) but are so indebted that many are unlikely to take it up. Another €8 billion in cheap credit is being offered to the private sector for the renovation of houses. These and his other measures are unlikely to boost growth much.

The unions are appalled by most of Mr Schröder's proposals. Most employers and economists, on the other hand, have welcomed them as a “good beginning”, but they say he must go much further. The conservative opposition, whose approval is needed for the reforms' passage in the upper house, has indicated it will provide support. Mr Schröder says he wants everything on the statute books by next year.

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