[A-List] Germany: political & economic crisis

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

Schröder admits little hope for fast recovery
By Haig Simonian in Berlin and Tony Major in Frankfurt
Financial Times: November 19 2002

Germany's chancellor, Gerhard Schröder, on Monday offered little prospect of
reforms to encourage an economic upturn in his new term of office, as the
Bundesbank warned that planned tax rises might jeopardise already fragile
growth in the euro-zone's largest economy.

The central bank, reporting that German GDP rose a meagre 0.25 per cent in
the third quarter, said the government's fiscal proposals could damage the
investment climate.

It urged the newly elected Social Democrat-led coalition government to
tackle labour market reforms and cut public sector spending rather than
raise taxes.

The incensed popular reaction to planned tax rises and subsidy cuts, not
hinted at before September's general elections, and ensuing coalition
squabbling lies behind the steep fall in support for Mr Schröder and his
party.

The latest opinion polls suggest no recent German government has suffered
such a precipitous drop in popularity so soon after re-election.

Mr Schroder on Monday admitted that the country's economic prospects did not
look good, saying "a lasting change is not to be expected in the short
term". He also unveiled larger than expected rises in federal government
borrowing for the next two years to meet lower than expected revenues. "If
anything the international environment is leading to further irritations,"
he said.

The government's budget revisions come after Hans Eichel, finance minister,
revealed huge revenue shortfalls for 2002 and 2003 after sluggish growth,
rising unemployment and a wave of corporate failures depressed tax receipts.
They also followed a European Commission decision to launch disciplinary
action against Germany for breaching European Union budget rules.

The cabinet will on Wednesday approve an emergency ?13.5bn increase in net
new borrowing this year. The new ?34.6bn total marks a dramatic break from
the steady downward course towards a balanced budget piloted by Mr Eichel
over the past four years.

Mr Eichel's 2003 budget has been similarly revised. Net new borrowing,
initially put at ?15.5bn and increased last month by ?2.6bn, has now been
raised by a further ?800m to ?18.9bn.

The latest changes to next year's borrowing follow wrangling in the
SPD-Green coalition and criticisms of Mr Eichel's initial proposals to
tackle a ?14bn budgetary gap in 2003.

The new measures to raise revenues include extending Germany's ineffective
capital gains tax. The move, heavily criticised by banks and retail
investors' associations, is expected to raise ?325m in 2004, rising to ?650m
the following year.

In its monthly report, the Bundesbank said budget proposals could hurt
private investment and reduce longer term growth prospects by increasing the
burdens on both business and private households.

It said the government should look at public sector costs. The bank also
said the government must take responsibility for national recovery,
insisting it alone had the power to promote the structural reforms, such as
labour market flexibility, the economy badly needs.

Mr Schröder's comments followed weekend efforts by leading members of the
SPD to distance the party from comments by Bert Rürup, chairman of the new
pensions and social services reform commission, that radical changes were
required to the overtstretched state pensions system.

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The high cost of Germany's timidity
By Oswald Metzger
Financial Times: November 19 2002

Germany is teetering on the brink of economic crisis. Consumer confidence
has plummeted; Berlin has been reprimanded by the European Union for failing
to bring the swelling budget deficit under control; tax revenues are in free
fall; and the five so-called wise men, the government's panel of economic
advisers, have torn apart the government's proposed fiscal policy. The mood
among investors is bleak indeed.

Any hope that, having secured his re-election, Gerhard Schröder would
implement much-needed structural reforms has turned to bitter
disappointment. The ruling coalition of Social Democrats and Greens has
signally failed to find a convincing strategic vision.

Although it is clear that labour costs are far too high, contributions to
state pensions are being increased. Health spending has been maintained,
even though the system needs to place more responsibility on private-sector
insurers. (State provision is becoming far too expensive for Germany's
ageing society.) Rather than cut spending, the government is raising taxes
to meet the the shortfall in revenues.

Such "emergency measures" during tough economic times might be the right
thing to do if, at the same time, the thresholds at which the highest-paid
and lowest-paid are liable for tax were raised.

Instead of focusing on the causes of the German labour market crisis - the
high cost of low-skilled labour - the Social Democrats and Greens have put
their faith in the Hartz commission. This inquiry aims to streamline the
operations of the massive federal labour agency; hardly the heart of the
problem. Germany's rigid and highly protective employment laws remain
untouched. Meanwhile, overtime and the black economy thrive.

Such timidity carries a high price. It means that for the German labour
market to pick up, the economy will have to grow by 2.5 per cent of gross
domestic product this year. Other European countries can reduce employment
with growth at 1.5 per cent.

Germany's malaise stems in part from the poor arrangements made at
unification. In the space of a few years, non-wage labour costs were allowed
to rise by 7 per cent. With the help of gigantic tax subsidies to the
property market, the construction industry hit a golden spell and
overcapacities were created, the removal of which still today reduces German
growth by more than 0.5 per cent a year.

The rapid adjustment of wages between east and west Germany on a 1:1 ratio
created record unemployment in the east. No one, however, questioned the
provision of social benefits now taken for granted by millions of people.

Since the short-lived unification boom at the beginning of the 1990s, German
growth has averaged less than 1.5 per cent a year, below the European
average. Social security costs have risen 2.5 times faster than real GDP
over the same period.

Hence the widening gap between government revenues and spending. Two figures
illustrate the alarming situation. Almost 42 per cent of all budget spending
this year is going to civil service pensions, in particular to the tax
allowance for pension schemes. Sixteen per cent of all spending is being
eaten up by interest on government debt.

In the recent election, one of the most unusual ever, hard truths about the
need for a paradigm shift within Germany's "social state" model were
scarcely mentioned. Instead, the weeks before polling day were dominated by
the catastrophes of the Elbe floods and the categorical refusal to commit
Germany to a war on Iraq.

Both government and opposition encouraged the belief that, one or two
problems aside, Germany would somehow get over the economic slowdown - that
any adjustment could be organised in a welfare state with social security.
The opposition played along, promising a spending spree and huge tax cuts.
This was despite the fact that it was not just economic experts who were
aware of the looming budget deficit.

Most people gave up on the Social Democrats as a modernising force a long
time ago. The party has never been so traditional and trade union focused
than it is today. Even the Greens, who worked for years to build a
reputation as reformers, have under the leadership of Joschka Fischer and
Fritz Kuhns become merely an echo of the SPD - preoccupied with the budget
and miles away from creating an economy that is not built on leaving a
burden for future generations.

Instead of increasing the electorate's confidence in the benefits of reform,
the protection of vested interests - masquerading as upholding social
justice - has become the new mantra. Mr Schröder, it seems, prefers setting
up commissions to implementing difficult changes.

Germany, a country with immense economic potential, is falling behind the
rest of Europe and the world. The tragedy is that its leaders appear unable
to see this.

The writer is a former budget spokesman for the Green party