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Last Updated: Thursday, 6 March, 2003, 11:51 GMT
Schroeder's economic headache

By Tim Weber
BBC News Online business editor

Chancellor Gerhard Schroeder
Schroeder: Not much to raise a glass to in the jobless numbers

Aside from sparring with the US over Iraq policy, Chancellor Schroeder has to occupy himself with just one big issue, the economy.

Annual growth weighed in at a mere 0.2% - the slowest in Europe - last year. And, with zero growth in the October-to-December period, there is little sign of any recovery.

For two years, until 2001, German exporters experienced a brief boom, driven by the weakness of the euro.

But since the US economy is in recession, demand for goods made in Germany is falling sharply, and euro interest rates are too high for the liking of the country's industry.


The German economy is held back by a "Reformstau", a logjam of much-needed reforms that have a habit of not materialising.

It's not so much Mr Schroeder who is to blame for this. His right-of-centre predecessors talked for 16 years about reforms, but delivered none.

It was Mr Schroeder's failure to deliver on his promise to push unemployment below 3.5 million that nearly cost him his job

The chancellor has made a few bold steps, reforming the system of capital gains taxes, for example. German industry, entangled in a system of crossholdings, can now get leaner, meaner and more competitive.

A sweeping reform of the income tax system is set to revitalise the economy as well.

But here the problems begin. Cleaning up after last year's devastating floods has proved so costly that the chancellor was forced to postpone the start of tax reforms by a year.

And the biggest piece of reform - making the labour market more flexible - has been much talked about but made little progress.

Failure to deliver

Unemployment is the scourge of the German economy. The jobless rate is among the highest in the EU, standing at 11.3% - or 4.7 million people.

And it was Mr Schroeder's failure to deliver on his promise to push unemployment below 3.5 million that nearly cost him his job.

In the run-up to last year's general election, a commission headed by an SPD-friendly industrialist, Peter Hartz, drew up a list of labour market reforms, which ranged from a root-and-branch reform of the system of job centres to new rules for part-time, temporary and low-paid workers.

Long-established entitlements will have to disappear

Mr Schroeder has promised to implement the plan, or at least parts of it, but he will be fought every inch of the way by both trade unions and employers, each fearing they will lose out in the process.

And the bitter election campaign, lasting most of 2002, deeply hurt Germany's consensus model of labour relations.

Bosses and union leaders engaged in brinkmanship not seen since the 1980s, resulting in that rare thing in German labour relations, widespread strikes.

Rein in healthcare

In this poisoned atmosphere, it will require all the chancellor's charm and diplomatic ability to restart the much-vaunted but hardly effective "alliance for jobs" between employers and employees.

To round off the list of problems, Mr Schroeder is under pressure to keep to tight spending limits, imposed by the eurozone's stability pact, cut back on bureaucracy and rein in escalating healthcare costs.

Perhaps most important of all, he also has to find a solution to Germany's pensions crisis, caused by an ageing population.

Oh - and add the much-needed reform of Germany's school system to the list of "must-dos". Superior education and vocational training, after all, underpin the high productivity of Germany's workers - and in turn their high wages.

Regional elections reverse

All this requires tough decisions on spending, benefits and subsidies. Long-established prerogatives and entitlements will have to disappear, and both workers and bosses will be smarting.

So can the chancellor and his partners in the Green Party come up with the ideas - and the resolve to implement them?

Even if they do, there is one big stumbling block. After poor results for Mr Schroeder in regional elections, Germany's upper house, the Bundesrat, is firmly in the hands of the country's conservatives.

And, if past form is any guide, they will show little willingness to forgo partisanship for the country's greater good.

"Reformstau" is a word that will dominate Germany's headlines for a few more years to come.

German economy at a standstill
26 Feb 03  |  Business
Yet more Germans out of work
06 Mar 03  |  Business

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