Why Schroeder is right

27th August 2004, Comments 0 comments

The reaction of Germans to Gerhard Schroeder's drive for a makeover of the nation's economy and its hulking welfare state is understandable.

The reaction of Germans to Gerhard Schroeder's drive for a makeover of the nation's economy and its hulking welfare state is understandable.

After all having been told for decades by successive governments that their pensions were secure and having enjoyed falling working hours combined with one of the world's best health services and comprehensive welfare benefits, it naturally comes as something of a shock to discover that the social state is in trouble and that hard-fought for work benefits appear to be disappearing by the day.

Emboldened by Schroeder's moves to press forward with tough reforms including unpopular cuts in welfare benefits and increased health service charges, employers have also now joined the drive to reform Europe's biggest economy.

Besides successfully pushing forward with a campaign to extend the working week, employers have been retreating from strict work contracts and stepping back from the nation's collective-bargaining system under which pay settlements in one region are adopted on a national industry-wide basis.

The scale of the upheaval and the concerns generated by Schroeder's so-called Agenda 2010 reform plan have plunged many Germans into a state of gloom about their nation's future with some declaring that the country is now in a state of decline.

*quote1*This is certainly something of an overreaction to what is essentially a long overdue process that many industrial nations have already been through with a large number of them (such as Britain) in much worse shape than Germany is today.

It is worth noting that Germany is now the world's leading export nation having overtaken the United States last year. This is hardly the sort economic performance that a nation in a state of decline normally turns in.

Also particularly vocal have been those saying that the reforms are far too late: but aren't they saying, let's do nothing? Aren't they saying, Germany has missed has the boat so let's just plod along like we always have?

Admittedly there have been major communication failings on the part of the Schroeder government in spelling out to a sceptical public exactly what they have in mind and to try to ally some fears about the reforms. Amazingly enough the government has even failed to seize on the good news.

Despite signs that the reforms to the health service have been working, government ministers have been few and far between on the nation's copious news programs driving home point that Berlin has achieved a real success in facing up to the deficit problems facing the health service. It has given the impression of a government running scared.

One result of this is that people claim Schroeder has no real strategy. Considering he never really stood for anything to threatening during his political career before he became leader of the world's third biggest economy it is easy to see why people would have doubts about his grasp of the vision thing.   

Indeed, for some unknown reason what his government really seems to have really failed to do is to communicate that it actually does have a plan. 

What people should understand is that the welfare and labour market reforms form part of a broader set of changes undertaken by Schroeder aimed at modernising the nation, including cutting back the nation's high labour costs and freeing up a very inflexible jobs market as well further liberalising retail trading hours and slashing red tape.

At the same time, Schroeder has moved to liberalise the country's antiquated citizenship laws, introduce a landmark immigration law, reform the armed forces and bring gay relationships into line with heterosexual relationships.    

The message is straightforward enough. The reforms are needed to ensure that Germany remains competitive in a world dominated by fast-paced globalisation.

But in country that sometimes appears like it has turned pessimism into a national pastime, it seems to be a message that many people simply don't want to hear.

*quote2*Preoccupied for almost 15 years with the series of changes caused by the breaching of the Berlin Wall in 1989, Germany is now in the midst of major economic rebuilding work to catch up with the changes that swept other industrialised nations more than 20 years before. Indeed, it has been decades since any major repair work was done on the welfare state.

Some have called on the government to plug up the holes in the welfare state's finances by tapping into the vast personal wealth in the country by introducing a wealth tax or hiking inheritance taxes. 

How would a wealth-type tax work? Would it be indexed to Germany's rapidly greying population? 

Apart from being almost impossible to imagine how any national German government would be able to push a wealth tax through parliament, the reality is that this is not the 1970s and Germany is no longer that island of economic success once known as West Germany.

The nation it is now part not just of the European Union but more significantly the closely economic knit group of nations that merged their currencies to form the euro.

Moreover in May this year a batch of Central European nations formally joined the European Union opening up new low-cost, highly skilled industrial locations for German companies. It is worth remembering that hourly labour costs in western Germany are about six times the rate in Slovakia.

But it is not just highly competitive labour costs that the new EU members have to offer, it is also tax rates with Central Europe now undergoing a Reaganite tax revolution. 

Dubbed “Monaco on the Donau,” Slovakia has this year launched a new 19 percent flat income, corporate and value-added tax. There is no tax on dividends with the country transforming itself into a tax haven.

Considering these developments, to argue for wealth taxes seems economic madness. And to be brutally honest Germany needs, at this point in time, increased taxation like the proverbial hole in the head. 

Besides any one with any money does normally keep it in Germany when Luxembourg and Switzerland (and possibly soon Bratislava) are just across the border.

More to the point there are already in effect wealth-style taxes in Germany. One is called the solidarity tax which transfers about EUR 80 billion a year from the wealthier west to the poorer eastern part of the nation.

Meanwhile, Berlin is also the principal paymaster for the European Union channelling huge amounts of the funds into the less well parts of the EU.

Others say that Berlin should open up the public purse has start spending on investment programs to help rejuvenate the economy.

But the ill-conceived growth and stability pact (a legacy of the Kohl years) means that the government cannot boost public spending to create jobs during times of economic downturn or launch major public investment programs during better times.  

The truth of the matter is that there is no alternative to the Schroeder reform plan.

For those complaining about the reforms and declaring that they intend voting for the conservative opposition Christian Democrat-led opposition it is worth remembering that they have been piecing together plans for an even bigger and possibly more painful restructuring of Germany.

August 2004

[Copyright Expatica 2004]

Subject: German news, reforms


0 Comments To This Article