Sun, Oct 19, 2003 page11

• Germany takes a step on path of economic reform

  • DPA
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  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.

  And in a bid to maintain momentum towards reforms, Schroeder has called a special weekend summit to consider further big changes to the nation's creaking pension scheme.

  Despite the uncertainty in the electorate unleashed by the reforms, the changes, which include measures to place pressure on the unemployed to find work, also help to address what political party opinion polls show is one of the voters' major concerns: abuse of the social state.

  Furthermore, the government 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.

  But with Germany having slumped into recession during the first half of the year and the ongoing reform debate, support for Schroeder's Social Democrats has plunged to about 26 percent, its lowest level since the government took office five years ago.

  Coming as new signs of life emerge in the German economy, the government is now hoping that the reforms will kick in just as economic growth takes hold in the nation and consequently lead to a turnaround in Schroeder's current political fortunes.

  The next national election is not due until 2006, but considering the unpopularity of the reforms even Social Democrat members are concerned about whether the party will stand a chance at the polls in three years time.
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