Merkel likely to seek gradual economic reform

5th September 2005, Comments 0 comments

5 September 2005, BERLIN - With polls pointing to opposition conservative Angela Merkel as likely winner of German elections, expectations are building that she plans a government firmly focused on economic reform.

5 September 2005

BERLIN - With polls pointing to opposition conservative Angela Merkel as likely winner of German elections, expectations are building that she plans a government firmly focused on economic reform.

Billed as Germany's Margaret Thatcher, Merkel promotes herself as committed to revamping and reviving Europe's biggest economy which has been stuck in stagnation for much of the past five years.

With Germany due for sluggish growth in 2005 and unemployment at 11.4 per cent, Merkel promises swift moves to liberalise the labour market and a fresh round of tax cuts.

Crucially, if Merkel manages to form a government of her Christian Democratic alliance (CDU/CSU) and Free Democratic (FDP) ally, it would break a political stalemate which has existed for years in Germany.

At present the CDU/CSU controls the upper house of parliament, the Bundesrat, where is can block Chancellor Gerhard Schroeder's bills passed in the Bundestag lower chamber by his slim Social Democratic- Greens majority.

A centre-right Merkel government would control of both houses of parliament, which has raised hopes in the business community that the 51-year pastor's daughter will push through rapid-fire economic reforms.

But economists are more cautious, seeing her stepping back from a radical revamp of the country's economy and instead building on the reforms launched by Schroeder's centre-left government.

"Even if there is a change in government, it is unlikely to result in a big reform push," cautions Morgan Stanley economist Elga Bartsch.

A centrepiece of Merkel's election manifesto is a controversial proposal to increase Germany's value-added-tax by 2 percentage points to 18 per cent, using part of the 16 billion euros (20 billion dollars) extra revenue to fund a cut in the nation's high non-wage labour costs to make hiring cheaper.

In particular, Merkel wants to use funds from the VAT hike, which would come into force in January, to cut the amount paid by employers for unemployment insurance of their workers from 6.5 per cent to 4.5 per cent of wages.

However, the increase in VAT would not be accompanied by immediate moves to ease the income tax burden.

Tax cuts are only scheduled for 2007, when a Merkel government says it would launch another makeover of Germany's complicated tax system by cutting the top tax rate from 42 per cent to 39 per cent and the basic rate from 15 per cent to 12 per cent. Merkel is also proposing a cut in corporate tax from 25 per cent to 22 per cent.

Merkel's decision to anoint former constitutional court judge Paul Kirchhof as her shadow finance minister has fuelled expectations that further big changes in the tax system could be in the pipeline.

Kirchhof has a radical blueprint for tax reform, including the introduction of a 25 per cent flat tax and has promised to take a "sledgehammer" to Germany's so-called Rhineland model of cozy corporate, union and government consensus.

Merkel also plans to free up the country's strict hire-and-fire laws by removing the job protection rules for companies employing less than 20 workers and allow corporations to pull back from industry-wide pay deals. Schroeder has already lifted job protection for companies employing less than 10 people.

A government headed by Merkel would close tax loopholes to raise an additional three billion euros in revenue and reintroduce the tax on capital gains from the sale of cross-shareholdings by big German companies that was abolished by the Schroeder government.

Boosting state revenue would help Merkel to meet her goal of knocking Germany's public deficit to below 3 per cent of gross domestic product within four years.

Under Schroeder's embattled finance minister, Hans Eichel, Germany is set to overshoot the eurozone's 3 per cent of GDP budget deficit limit for the fourth year in a row in 2005.

At the same time, Merkel wants to lower bureaucratic hurdles to investment to free up loans for the country's small-to-medium sized business sector and to halt the Schroeder government's plans to phase out nuclear energy which provides 30 per cent of Germany's power.

Declining birth rates, an ageing of the population, weak economic growth and high unemployment have also placed enormous pressure on Germany's once generous welfare state.

Indeed, with a financial crisis threatening to engulf Germany's state pension and health systems, a wholesale reform of the nation's social welfare framework is widely seen as critical.

With this in mind, Merkel has drawn up another controversial plan this time imposing a flat health-care monthly fee of 109 euros, which would be paid regardless of wage.

In a bid to boost Germany's sagging birth-rates, the childless Merkel plans to provide a bonus of 50 euros a month for every child born after January 1 2007 until it reaches 12 years of age.


Subject; German news


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