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Tuesday, March 18, 2003

Schroder Struggles to Convince

This, anyway is the Economist view of things.They are worried by the reform appetitite and the will to change of the German Chancellor. I am worried about the diagnosis.

To be sure the German panorama does not look exactly appetising. After years of sub par growth, followed by a series of failed sallies on the part of the larger communications and technology enterprises into the new economy and the internet, and accompanied by deteriorating demographics and resistance to immigration, now, with deflation knocking on the door, Chancellor Schroder is for the first time seriously talking about addressing the problem of reform.

The Chancellor's main proposals, none of which come as a surprise, are aimed at making it easier for employers to fire workers, reducing the length of time unemployed people can receive benefits and eliminating some of the costs of the national welfare system. The program also includes proposals to increase public works spending, to make it easier for small businesses to hire temporary workers and to require unemployed people who have received welfare payments for a year or more to accept jobs, even if undesirable, that are offered to them by the state employment agencies.

Many of these reforms may well be necessary, and long overdue. The question is will they have the impact intended. My feeling is that the majority of the measures, in the short run, can only make the problem worse. Most Germans will feel more, not less, insecure. Meantime euro zone interest rates are way above what is required to treat the German malady (which could well turn out only to be a new variant of the Japanese one).

Germany needs a change of direction and a change of mentality. In particular there is a need on the part of politicians, employers, unions, civil society, in fact almost everyone for a recognition that fundamental change is needed. Changes in attitude to innovation and risk, to the internet, to the relations between the English and German languages, to patterns and styles of work. Despite all the talk of knowledge-based and information societies, there is little imagination being exercised in the search for change. For example, one of the consequences of the increased acces to and sharing of information through the internet and distinuted, SETI style, computing, is that tthe whole R&D situation has changed dramatically. The EU governments, however, still think in terms of the 'old' model of large scale, state-subsidised research. Isn't the key to change in Germany about motivating a new generation of young people with different values. Isn't it time they woke up to the fact that 'sharing' is about more than MP3. Wouldn't they do better subsidising high speed internet for the young people, and actively promoting on-line collaborative communities?

Above all Germany needs to recognise that it cannot do this alone. There is still a window of opportunity open for Germany, but passing through it means opening the doors to all those young people worldwide which Germany so badly needs. It means a new approach to German identity, to multiculturalism and diversity. For one thing is clear. This, not a new employment law, is the structural change Germany badly needs. Without it the future, as I said, does not look appetising.

CORNERED must be how Gerhard Schröder feels these days. With his opinion-poll ratings plummeting, and desperate to rescue his political reputation, the German chancellor unveiled a new package of economic reforms in parliament on March 14th...... About the diagnosis, there is no longer much debate. The largest economy in Europe is in deep trouble. It is, once again, teetering on the brink of recession, with growth forecasts for this year slashed to nearly zero. Unemployment is climbing—at 4.7m it is now well above the level that Mr Schröder inherited in 1998 and which he pledged to tackle in his first four-year term. Germany’s labour laws discourage companies from hiring workers in the first place: both because pension and other add-on costs make it expensive and because it can be difficult to slim down the workforce if business declines. The country’s generous but hugely expensive welfare system has become unsustainable and is putting great strain on the government’s finances.

In the past, tough talk of reform has petered out—proposals have been watered down or abandoned. Germans are anxious about the state of their economy. But many are also strongly attached to the generous welfare provisions which the state provides. On the streets, Germany still feels like an affluent country. Not everyone is yet convinced of the need for urgency or radical change—a situation not unlike Japan in some respects. Mr Schröder’s political position was further undermined by defeats in two crucial state elections in February. These gave the opposition a clear majority in the upper house—one that they used on March 14th to block changes to the tax system which the government wanted to push through. Unusually, there are only two further state elections this year, in May and September, which might give the chancellor some breathing space to show he can deliver his economic reforms. The changes he has now proposed are an absolute minimum, and might not be sufficient to rescue what is left of the chancellor’s reputation. Any backtracking now could fatally undermine his position and would probably revive talk of a new election or of a grand coalition in the national interest between the two main parties. It seems unlikely that Mr Schröder would survive in either case. For him, as well as for the German economy, the stakes are high.
Source: The Economist

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