[A-List] Germany: fiscal crisis

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

Economists urge austerity
'Five wise men' blame labor and welfare policy for stagnation

By Edward Roby
Frankfurter Allgemeine Zeitung Weekly, November 15 2002

Home-made problems with tax, social and labor policies, not cyclical
cooling, are primarily to blame for bleeding the growth out of the German
economy, the government's Council of Economic Advisers told Chancellor
Gerhard Schröder on Wednesday.

The panel, known as the "five wise men," urged the government to tighten its
austerity program now in order to avoid breaching the euro-zone ceiling on
deficit spending again next year.

"The inadequate growth momentum in Germany is not so much a cyclical
phenomen. It is primarily a structural problem," the advisers said in their
autumn report to the chancellor. They outlined a 20-point reform plan, which
dwelt mainly on measures to relax job protection for employees and to lower
the threshold for wages. "The way to full employment requires curtailments
in redistribution goals and in the welfare state," it said.
The panel of economists projected that the German economy, straggling at the
rear in western Europe, would expand by only a real 0.2 percent this year,
mostly because business spending on equipment will have collapsed by 7.4
percent. The panel predicted an improvement to about 1 percent real economic
growth next year, too weak to put people back to work. It forecast official
unemployment of 4.17 million in 2003, an increase of about 110,000 from this
year's average.
This discouraging news coincided with an estimate from another federal panel
warning that tax collections this year would fall by EUR15.4 billion ($15.5
billion) below the government's budget estimate, followed by a shortfall of
similar magnitude next year. Immediately after the Sept. 22 election, the
finance ministry had tackled that problem with a series of proposals to
close tax loopholes from which mostly farmers and energy-intensive
industries had benefited. Since then the ruling coalition has been tossing
painful measures overboard to appease outraged interest groups.

The economic advisers rallied to the cause of the beleaguered austerity
faction with a call for even more drastic government savings and cuts in
outlays. It also took aim at the swelling chorus of critics of the
Maastricht ceiling on deficit spending, blaming spendthrift domestic policy
of the past rather than the Maastricht constraints for causing Germany's
current fiscal dilemma. It would be wrong to scrap the euro-zone limit on
deficit spending of 3 percent of gross domestic product because that could
destabilize the euro, it argued.

Shortly before the Wise Men weighed in, the EU Commission had notified
Germany that it was beginning a formal review of the country's excessive
deficit spending. The economic advisers also concluded that Germany would
run an outsized deficit of 3.7 percent of GDP this year. And they said next
year's deficit would red-line at 3.3 percent unless the government takes
decisive action. The gap between the council's 2003 projection and meeting
the Maastricht limit works out to about EUR6 billion, an amount which the
finance ministry's plan could still handle.

The economic advisers based their growth projection for next year partly on
the assumption that the price of imported oil would average $25 a barrel. A
war in the Middle East oil fields would probably drive it higher, though.

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Generational justice

By Holger Steltzner
Frankfurter Allgemeine Zeitung Weekly, November 15 2002

The German population is shrinking, and the age pyramid is being reversed.
Today 2.3 persons work to pay the pension of one retiree. In about 30 years,
one worker would have to finance one retiree.

An impossible scenario. But instead of being told clearly where they stand,
retirees and employees have been told for years that their pensions are
safe. Didn't the "red-Green" government sell its pension reform as a big
reform scoop and celebrate the introduction of additional private retirement
provisions as the rescue for the pay-as-you-go system?

It is well-known that Social Democrats and Greens care little about
yesterday's promises. Although state pension insurance is being drip-fed by
steadily rising energy taxes, payroll withholdings will be hiked again
sharply in 2003. Instead of limiting increases in pension expenses, the
government is using an additional hat trick by raising the maximum monthly
earnings subject to the payroll tax.
This will boost inflows into the ailing state pension insurance in the short
term. In the long term, however, it will inevitably entail an even higher
burden on future generations because higher contributions today also mean
higher demands from future pensioners. The result is predictable. Younger
contributors to pension insurance are being milked twice. They have to pay
higher contributions now but will receive less money when they retire
because the current level of pension payouts isn't sustainable.

The notion of generational justice, which underpins the pay-as-you-go
system, is lost along the way. Naturally, today's retirees also make a
financial contribution because pension increases lag wage increases. In the
medium term, however, there is no way around raising the retirement age, if
only because of the Germans' extended education periods and rising life
expectancy. The employer associations rightly demand that the regular
retirement age be raised to 67 years from the current 65, but they should
start at home. With the approval of the unions, all too many companies
currently send older workers into early retirement. This is why the actual
average retirement age in Germany is currently no higher than 60.

Any social reform must be based on the realization that a pension reform
presupposes a liberalized labor market because mass unemployment jeopardizes
future pension levels. Since the proposals of the Hartz commission on labor
market reform will create no new jobs or break up labor-market rigidities,
the government commission charged with a reform of Germany's social systems
can probably also do no more than deal with the symptoms. What Germany
needs, though, is to get to the root of the problem.

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Doctors and pharmacists take to the streets
Frankfurter Allgemeine Zeitung Weekly, November 15 2002

More than 13,000 doctors, dentists, nurses and pharmacists demonstrated in
Berlin on Monday and Tuesday against Health Minister Ulla Schmidt's planned
austerity measures for Germany's ailing statutory healthcare system. The
protestors voiced their anger over the impending legislation, which includes
freezes on pay and hospital funding and cuts in the billable costs of
pharmaceuticals. They warned against job cuts and a lower quality of medical
treatment for German citizens. The contested legislation will be debated in
the Bundestag parliament on Friday.