Economists disappointed at lack of reforms

1st March 2006, Comments 0 comments

1 March 2006, BERLIN - More than 20 years have passed since former conservative German Chancellor Helmut Kohl came to power promising to follow the lead of Britain and the United States with a rigorous round of economic reforms.

1 March 2006

BERLIN - More than 20 years have passed since former conservative German Chancellor Helmut Kohl came to power promising to follow the lead of Britain and the United States with a rigorous round of economic reforms.

However, the Kohl era ended almost eight years ago with very little to show in the way of major changes to Europe's biggest economy.

Now, despite the reform drive in recent years by Gerhard Schroeder's Social Democrat-led coalition, the need for a far- reaching economic makeover of Germany appears to have fallen off the agenda of Angela Merkel's new grand coalition.

Indeed, as Merkel's Christian Democrat (CDU/CSU)-Social Democrat (SPD) government marks its first 100 days in office, economists are expressing their dismay at how Germany's political establishment appears to have backed away from the subject of reforms.

"The government has done very little on reforms," said Rainer Guntermann, senior European economist with Dresdner Kleinwort Wasserstein. "We are not getting those reforms which were proposed last year."

Apart from a plan to raise the retirement age to 67, Merkel is ending her first months as Germany's first woman chancellor with impressive popularity ratings but little to show in terms of restructuring the hard-pressed welfare state or its fragile labour market.

"It is absolutely true that nothing much has been done," said Klaus Baader, European economist with Merrill Lynch.

Instead of focusing on what can be done, the reform debate continues to be couched in terms of why things cannot be changed, with the opposition reverting to slogans such as "we stand for social justice," "we don't want America over here," or "we don't want the British model."

Whatever Germany's post-World War II achievements, it would be hard to find a country where Germany now serves as an economic model, as unemployment hovers around a staggering 12 per cent.

In the meantime, hopes that the government might launch a new round of reforms of Germany's deficit-hit health system have been dashed by signs of big differences on such reforms between the Christian-Democrats and the SPD.

The stasis has also eroded expectations that the 51-year-old Merkel might inject new momentum into the reform programme once three key state elections are out of the way later this month.

What is more, despite only a slight improvement expected this year in unemployment figures, the government is proposing only minor changes to Germany's notoriously inflexible labour market.

"We should be asking ourselves, why we don't create jobs in Germany," said Elga Bartsch, European economist with the US investment house Morgan Stanley.

How to go about injecting greater flexibility into the labour market has become essentially a taboo subject, resulting in virtually no debate on the tough measures that might be needed to create jobs and stem the steady stream of lay-offs.

Such measures could include revamping strict job protection laws, boosting retraining schemes, promoting part-time and temporary work and making changes to the country's wage agreements.

"The higher the job protection, the higher the obstacles to job creation," said Baader.

A measure of how far labour market reforms have slipped down the government's list of priorities is to be found in the praise that Merkel's coalition has won from leading German union leaders, who were some of the fiercest critics of Schroeder's reform plans.

Instead, the government has made cutting the budget deficit the cornerstone of its economic policy.

Of course, the irony for the government is that if it did bite the bullet and tackle labour market reforms, it could reduce the strain on the budget caused by financing the more than five million unemployed.

In addition, with the threat of job cuts making Germans very reluctant to open their wallets, tackling the labour market might also help boost consumer spending.

For the time being, Merkel's strategy seems to be aimed at building voter confidence in the coalition by riding the goodwill created by the recent signs of a pickup in the economy.

More to the point, she seems intent on dispelling the gloom in part created by the long-running and tense debate under Schroeder's SPD-led government about the need for reform.

For many economists, the message that emerged from last September's inconclusive election was that the German electorate has little stomach for far-reaching reforms to the nation's welfare system and labour market.

Merkel, like her mentor Kohl, appears to have understood that message.


Subject: German news

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