[A-List] Germany: Die Neue Mitte

["Keaney Michael" <Michael.Keaney@xxxxxx>]

The FT, banging its "end of Deutschland AG" drum once again...


Work in progress
A decade of rising unemployment and modest economic growth has convinced
Germany's politicians of the need to push ahead with labour market
reform, says Tony Barber
Financial Times: March 26 2002

Four million people are out of work. Trade unionists held short warning
strikes on Monday and are planning more stoppages. Even the half-brother
of Gerhard Schroder, the Social Democrat chancellor, has lost his job as
a sewer worker.

At first sight, Germany's labour market appears to be in deeper trouble
than ever. The insolvency at Philipp Holzmann, the construction group
saved from collapse in 1999 by Mr Schroder's personal intervention,
merely drives the point home.

But with national elections only six months away, the prospects for
labour market reform in Germany may, at long last, be improving. While
much will depend on the next government's political complexion, even the
re-election of the SPD-Green coalition government may produce more
effort at reform than at any time since unification in 1990.

The catalyst has been a scandal at Germany's federal labour office,
where auditors discovered last month that the agency had grossly
exaggerated its success in finding people jobs. "The recent scandal has
sparked a major debate and possibly an acceleration of the timetable for
labour market reforms," says Joachim Fels, economist at Morgan Stanley.
"Additional reform steps may now even be taken before the September
election and more comprehensive measures to deregulate the labour market
look likely after the election."

Florian Gerster, the labour office's newly appointed head, has already
broken taboos by calling for measures such as cuts in the length of time
that older people receive unemployment benefit to encourage them back
into work. "After the election, we will need further sustainable labour
market reforms," he says. "The labour market in this country is too
rigid and ponderous in comparison with others."

Increasingly, the debate in Germany is about the timing and extent of
reforms, rather than the need. Ten years of rising un-employment and
modest economic growth are at last creating momentum for change.

Not before time, says the International Monetary Fund. In a report last
year on the German economy, it praised the government for reforming tax
and pension systems and opening up telecommunications and utilities
markets. But the IMF said more economic flexibility was needed,
declaring: "Labour market reform heads the list."

Germany's expensive and over-regulated labour market generates wider
problems in the eurozone. By holding back economic growth, it puts
pressure on the German budget deficit, an issue that recently forced an
acrimonious confrontation between Mr Schroder and the European
Commission. Furthermore, it instils scepticism in financial markets
about the eurozone's ability to match US growth rates. "With its big
economic weight, Germany is dragging overall growth in the eurozone
clearly downwards. The euro's weakness has quite substantial roots
here," says Otmar Issing, the European Central Bank's chief economist.

Locked into a fixed exchange rate and common monetary policy with its 11
eurozone partners and tied down by fiscal rules set at European Union
level, Germany has to launch domestic economic reforms if it is to
regain the growth rates that made it Europe's strongest economy after
1945.

It is true that Germany's labour market has a worse reputation in some
ways than it deserves. Its labour force participation rate for workers
aged 15-64 is 71 per cent, above the eurozone average of 68.6 per cent.
Part-time employment as a percentage of total employment has risen to
19.4 per cent from 15.2 per cent in 1991. However, Germans work fewer
annual hours per person than all other EU nationals except the Dutch.
Public spending on unemployment compensation is close to 2 per cent of
gross domestic product, again trumped only by the Dutch.

Most glaringly, Germany still has more than 1m job vacancies. Almost 40
per cent of companies cannot fill vacancies, says the Association of
German Chambers of Commerce and Industry. These include not only
specialised jobs in machine tool building and information technology but
also low-skilled jobs in security and cleaning companies - evidence of
the need for stronger incentives to boost low-wage employment.

The government last week claimed victory for an immigration reform aimed
at making it easier for well qualified foreigners to settle in Germany.
But the reform's legal status remains uncertain. And, in any event, the
government's overall record in office has been poor. It has avoided
challenging powerful interests, above all the trade unions - perhaps not
surprisingly: 70 per cent of SPD members of parliament are unionists.

The government has tightened labour market laws by giving workers the
right to demand part-time work, making it harder for employers to hire
workers on fixed-term contracts and extending worker representation in
companies. Mr Schroder has put much faith in his Alliance for Jobs, a
forum for government, employers and unions, but its hollowness was
exposed late in 2001 when it failed to produce consensus on this year's
wage negotiations in big industries.

As a result, the IG Metall union, with 2.8m members in the car,
engineering, electrical and other industries, began holding short
warning strikes yesterday to demand a 6.5 per cent pay rise. History
shows that a compromise is usually reached before full-scale strikes are
held but the dispute offers the union a chance to assert its influence
in the run-up to the election.

However, this has not stopped the government from taking initiatives
that may herald a bolder attempt at labour market reform if it wins
re-election. First, it has promised wholesale changes at the labour
office, a vast institution with 90,000 staff and an annual E50bn
(£31bn) budget. The labour office pays unemployment benefits and is
funded by contributions from employers and workers amounting to 6.5 per
cent of gross wages. Any cuts in benefits, staff or the office's general
budget could thus help reduce Germany's high non-wage labour costs,
which deter hiring.

The government is also expanding the role of private employment
agencies, a measure praised by an ECB report this month that was
otherwise implicitly scathing about Germany's labour market performance.

Last, the government is implementing a scheme to subsidise the social
security payments of the low-paid, so that people with few skills will
take low-wage jobs in the knowledge that their net pay will be higher
than before. This step has its critics, such as the ECB, which notes
that "in general, such measures are second best to necessary reforms of
tax and benefit systems".

One potential drawback is that the subsidies required to fund it may in
the end come from taxes elsewhere. But the principle behind it, that of
supporting employment by cutting labour costs, is sound. For a
centre-left government fighting for re-election, it is a start.

Would reforms be more extensive under Edmund Stoiber, Mr Schroder's
challenger from the centre-right Christian Democrat-led opposition?
Perhaps not, to judge from his record as prime minister of Bavaria.
"From agriculture to steel mills, weak sectors of the economy are
propped up with subsidies in the name of preserving jobs," says Manuela
Preuschl of Deutsche Bank Global Markets Research.

Mr Stoiber supports the government's proposal to pay German union wage
rates to workers from non-German companies, especially in construction.
"The anti-market instincts of the opposition are not very different from
those of the government. The main force that drives the liberalisation
process in Europe is the European Commission, not German politicians,"
says Dieter Wermuth of UFJ Bank.

On the other hand, Mr Stoiber says he will curb the expanded system of
employee representation in companies. And like many challengers, he
prefers to show as little of his hand as possible so that he can
campaign primarily on the incumbent government's weak spots.

The chances of serious labour market reform would probably be brightest
if Mr Stoiber governed in coalition with the free-market Free Democrats,
says Thomas Mayer, economist at Goldman Sachs. Worst of all, in his
view, would be an electoral deadlock that resulted in a grand coalition
between the SPD and the CDU.

But whatever the election result, expectations of a greater push on
German labour market reform are building. If the next government fulfils
them, the winner will be not just Germany but the eurozone as a whole.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3HYNHP8ZC&live=true

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx