The chancellor gets his way, so far

Date: 07/06/03

Germany's economic reforms are on track, for now

MANY doubted whether Germany's Social Democratic chancellor, Gerhard Schröder, would have the guts to push through the package of labour-market and welfare reforms he unveiled in March. His blustering claim that “what has been decided will now be implemented” was received with widespread scepticism. The leader of a party so beholden to the trade unions was bound - his critics sneered - to buckle in the face of the “massive resistance” promised by the union leaders. But so far he has not. Indeed, he has just notched up his first big victory in his battle to get the whole of his “Agenda 2010” reforms on to the statute books by early next year.

At a special party conference in Berlin on June 1st, Mr Schröder won an unexpectedly handsome vote of confidence, without having seriously to water down his plans. Party officials said that some 90% of the 524 delegates gave their approval on a show of hands for what, despite its limitations, is probably Germany's most far-ranging batch of reforms in half a century. They include an easing of job protection, cuts in unemployment and sickness benefit, and a relaxation of the rules on collective bargaining.

The only notable concessions won by the rebels were a commitment to “examine” demands to reintroduce a wealth tax and increase inheritance tax; a threat by Mr Schröder to put financial sanctions on companies that fail to offer apprenticeships; a withdrawal of plans to bring in a flat-rate savings tax of 25%; and the promise of a costly programme to help provide jobs for older people out of work. The government may also agree to extend the period of full unemployment benefit for those over the age of 55 if they cannot find a suitable job. Under its present plans, the maximum period of full benefit would be cut from 32 months to 18 months for the older unemployed and to just a year for those under 55.

Throughout his conference speech, entitled “Courage for change”, Mr Schröder hammered away at what have become his favourite themes. “We cannot go on as we are,” he said. “There's no way we can avoid change...We must say goodbye to much that has become dear to us but is also, sadly, too expensive...We must change our mentality and have the courage to face up to reality...Demographic decline and an ageing population will soon make our health and pensions systems unaffordable...A lot will have to change just in order for our high standard of living and exemplary welfare system to remain as they are....There's no reasonable alternative.”

All that is a far cry from the speeches he made in his re-election campaign in the autumn. Nearly a year will have been wasted by the time the reforms start biting. Are Germans now ready for them?

In the past, they have always indicated that they were, but then rejected measures that threatened to hurt them personally. Now, at last, they may have begun to realise that painful change can no longer be put off. Two in three Germans say that reform is urgent. A third even say that the government's plans do not go far enough; only a quarter say they go too far. Yet despite this apparent approval for the government's package, support for the ruling Social Democrats has fallen to its lowest point (around 26%) since the second world war, putting the opposition Christian Democrats and their Bavarian sister party, the Christian Social Union, a good 20 percentage points ahead in the opinion polls.

Could it get any worse?

This may be largely due to the economy's continuing gloom. After its contraction in the first quarter, there are fears it may decline again in the second, sending Germany into its second recession in just over a year. Unemployment is fast approaching a post-war record. Welfare contributions, equivalent to over 42% of gross wages, are nearing their highest point ever. And public finance is in crisis. Mr Schröder has admitted for the first time that the deficit may, for the third year in a row, exceed the euro zone's limit of 3% in 2004.

But all this could turn out to be a blessing in disguise. One top Social Democrat has conceded: “If we had 2.5% growth this year, the reforms would have been put off yet again.” Mr Schröder insists that his party's unpopularity and its electoral humiliation in state elections earlier this year were “not because we were too pro-reform but because we were too timid”.

Mr Schröder is delighted by the recent unexpectedly strong backing for his reforms at the party conference. But he knows that the hardest part lies ahead. His party is split. The government has only a nine-seat majority in the Bundestag, parliament's lower house. A handful of rebels could defeat the government. In the Bundesrat, the upper house, where federal Germany's 16 states are represented, the government is already in a minority. That could get even slimmer if the ruling Social Democrats in North Rhine-Westphalia, Germany's most populous state, carry out a threat to dump their Green partners in favour of a coalition with the liberals.

The conservatives have offered Mr Schröder “constructive support” for his plans, so long as they “go in the right direction”. That, at least, is their official line. But behind the scenes, they talk of blocking every bill that comes before the Bundesrat this autumn in the hope of toppling the government and forcing the Social Democrats into a “grand coalition” with themselves. They would then press Mr Schröder (or, more likely, his successor) to adopt even more unpopular reforms and finally force a general election as the Social Democrats' support begins to drift away.

That, at least, is the rumour. What is certain is that Mr Schröder needs all the stamina and courage he can muster over the next six months to see his plans through - and save his own political skin.

Germany's economic reforms are on track, for now.

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