[A-List] Germany: financial crisis

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

Pensions funding gap hits Schröder reforms
By Hugh Williamson in Berlin
Financial Times: March 12 2003

German economic reform efforts will face a further setback on Thursday when
its leading pensions association warns that statutory contributions will
have to increase sharply to cover a looming gap caused by feeble growth in
Europe's biggest economy.
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The VDR association of statutory pension funds, an advisory body that
influences government policy, will say increasing contributions to the
state-run pay-as-you-go pension system from 19.5 to 19.9 per cent of gross
wages may be unavoidable given the weak economy and high unemployment.

The warning comes as a bruising blow to Gerhardt Schröder, the German
chancellor, who will deliver a keynote parliamentary speech on Friday aimed
at reducing the non-wage labour costs borne by employers.

An increase in pension contributions, shared by employers and employees,
would further push up costs, increasing the competitive pressures on the
economy. An increase of 0.4 percentage points is equivalent to ?3.5bn.

Any increase in pension costs will also fuel tensions between Mr Schröder's
Social Democrats and the Greens, the junior coalition partners. Green
opposition to the increase to 19.5 per cent last year was overruled.

The forecast of higher costs came as the opposition Christian Democrats
threatened to withhold crucial support for Mr Schröder's reforms unless he
used Friday's speech to present a far-reaching "master plan" for recovery.

Mr Schröder has promised a package of labour market and social security
reforms. He said last night the measures would involve "sacrifices by many
people".

In a Financial Times interview, Friedrich Merz, the CDU's parliamentary
economic spokesman, said minor adjustments would not be enough. Mr Schröder
"must completely change course after four-and-a-half years of economic
policy. This country has been living from its own reserves for many years.
We can't go on like this. He must present a national master plan."

This had to include elements that were taboo within the SPD and the unions,
such as greater wage flexibility for economically troubled companies within
Germany's industry-wide collective bargaining agreements. Observers doubt Mr
Schröder will address this issue.

The government needs opposition support in the CDU- controlled upper house
of parliament to pass tax measures and reforms of unemployment benefits and
the welfare state.

Franz Müntefering, leader of the SPD parliamentary group and a close
Schröder aide, said that after the chancellor's speech the ruling coalition
would by the summer adopt reforms on "health, the labour market and labour
law".

His comments are significant as Mr Schröder is expected to face opposition
in the parliamentary group, especially to labour market and labour law
changes.

Additional reporting by Timo Pache in Berlin