Germany’s reform Chancellor - part I

20th October 2003, Comments 0 comments

Gerhard Schroeder is battling on with his far-reaching but deeply unpopular economic reform plans. And in the first of a two-part series on the reforms, Andrew McCathie argues that in introducing the long overdue changes Schroeder risks sacrificing his Chancellorship for the cause of reform.

Schroeder’s aggressive reform push has also been held against the backdrop of growing pressure on Germany’s public finances with dwindling tax revenue and high unemployment resulting from a weak economy likely to lead to the nation’s public deficit again overshooting the strict fiscal target for euro member states.

The Social Democrats and their Green Party coalition partners have been forced to take some urgent action to deal with the pension system after confirmation that it was facing a EUR eight billion deficit next year, which could place at risk the government’s pledge not to increase non-wage costs.

The sitting of parliament and the pension summit were the culmination of weeks of high political tension in Germany with the Chancellor managing to haul six leftwing rebel members of his party in behind the reform package only after agreeing to a series of last-minute compromises.

Schroeder has staked his political future on the reforms having at one point threatened to resign if his party failed to endorse the moves, which include bringing forward tax cuts totalling about EUR 15.6 billion, a reorganisation the nation’s labour office and reductions in unemployment benefits.

“In historic terms this is a quantum leap for Germany,” said Adolf Rosenstock, European economist with the Japanese investment house, Nomura, in Frankfurt.

“This is the first time in 30 years that the social welfare state is being substantially cut back,” said Rosenstock. “Previously, there has been cuts but mainly the there has been an expansion in the social state.”

Apart from injecting a new sense of flexibility into Germany’s lumbering economy and helping to end a three-year economic slump, financial markets see the legislation as a test of the resolve of Europe’s biggest economy to press on with much-needed reform.

But the government has only a wafer-thin parliamentary majority in the lower house of parliament (the Bundestag) and faces possibly even tougher tests in the coming weeks as it seeks to negotiate the reforms through the opposition-dominated upper house, the Bundesrat, which will involve hammering a new set of deals with the opposition.

Moreover, the markets believe that the changes unveiled so far stop short of the big reforms that helped to reshape many Anglo-Saxon nations 20 years ago and that are now being introduced in many Central European states as part of their final push to join the European Union.

That said, however, many analysts also conceded that the reforms passed by parliament were important because they signalled a change in direction in Germany describing them as a key step in a very painful process.

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