Sun, Oct 19, 2003 - Page 11 News List

Germany takes a step on path of economic reform


Germany took an historic step Friday towards a major makeover of its stagnating economy with parliament signing off on a landmark reform package drawn up by Chancellor Gerhard Schroeder's ruling Social Democrats.

Friday's sitting of parliament was 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 changes, which include bringing forward tax cuts totalling about 20 billion euros, a reorganisation of 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 have been cuts but mainly 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 major 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 and could face another rebellion from within its ranks as it attempts to press on with more reforms.

Despite Schroeder's battle to introduce the reforms, financial markets believe that the changes 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 EU.

"The markets want more radical change and the economy needs more radical change," said Ken Wattret, analyst with the French investment house, BNP Paribas, in London.

However, he said the reforms passed by parliament Friday are important because they signal a change in direction in Germany.

"They are an important step in a very painful process," Wattret said.

Despite the scepticism of the markets, he said, the moves are commendable.

Indeed, Schroeder has won rare praise from German industry for the package of reforms with the president of the influential Federation of German Industry, Michael Rogowski, describing the government's plans as "very credible" and saying that the Chancellor had "made a courageous start" with the measures.

But while there is a sense of upheaval in Germany about the pressures on the nation's economy and its social state, it is still a far cry from the crisis that forced the UK onto the path to reform in the late 1970s.

Back then the British economy was engulfed by stagflation with the so-called winter of discontent symbolising Britain's economic woes.

Rosenstock also points out that in the case of Central Europe, the economies had collapsed following the fall of communism.

Today's legislation forms part of Schroeder's so-called Agenda 2010, which also involves sweeping changes to the nation's hard-pressed labor market and its deficit-hit health and pension systems.

After months of deliberations, parliament last month agreed to the government's health reform bill, which called for a 20 billion euros reduction in healthcare spending.

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