Back Germany: Much hinges on the `new management'
Raghu Dayal
The phlegmatic herrenvolk were never likely to descend to our type of politicking — loud, murky, no holds-barred. Both Mrs Angela Merkel, leader of the Christian Democratic Party (CDU), and Mr Gerhard Schroeder, the incumbent Chancellor of the Social Democratic Party (SPD), staked claims to head the new government. As many in India clamour for a national government to cope with the country's problems, quite a few in Germany felt that Christian Democrats and Social Democrats might as well forge a "grand coalition," although the only one Germany tried in 1966-69 is termed a failure.
Wedded to a tradition of consensus and mired in the bogs of federalism as Germany is, it is always hard to push reforms through its political system. Apprehensive of any radical changes, the country as a rule remains wary of liberal ideas and political experimenting. According to Oswald Spengler, German historian and philosopher, "There are principles in Germany that are detested and disreputable; but on German soil it is only liberalism that is contemptible".
The centre-Left government, under Mr Schroeder, in coalition with the Greens, took office in 1998, and staged an unexpected win again in 2002 over the opponent, Mr Edmund Stoiber. It could not reform the Europe's biggest economy. GDP grew by a meagre annual average of 1.4 per cent during the previous decade, half the EU average, and well below US' 3.3 per cent. Unemployment crossed the perilous five-million mark.
The SPD lost almost every state election since the reforms package, Agenda 2010, was presented in 2003. The party was trounced in the May 2005 election in North Rhine-Westphalia, for the first time in 39 years, and this was widely viewed as a referendum on Mr Schroeder's performance. It signified a Teutonic shift in German political loyalty.
The pre-poll projections did go awry: One opinion poll conducted in May 24-26 had put the CDU-CSU (Christian Social Union) alliance at 45 per cent of the vote, and only 30 per cent for the SPD. The big new contender for the liberal vote was the CDU, long reckoned a defender of Germany's cautious and consensual welfare capitalism.
Mrs Merkel saw her lead shrinking in the run-up to the election; Mr Stoiber, the CSU leader, sabotaging; and Mr Oskar Lafontaine, the former SPD chairman and now leader of the Left Party, losing credibility. Mr Schroeder started to look better and, eventually, put up a better show than expected.
No naïve Ossi (East German) bumpkin that some initially took her to be, Mrs Merkel, a childless Protestant, unpretentious, almost reticent, but shrewd and tenacious, with a degree in physics, is compared, perhaps, unfairly, to Britain's Iron Lady, Mrs Margaret Thatcher. Her reform programme represents progress but hardly a break from the status quo. Mrs Merkel's modest 40-page election manifesto envisaged an increase in the VAT rate from 16.5 per cent to 18 per cent, the proceeds to help cut the unemployment insurance rate from 6.5 per cent to 4.5 per cent of wages; revoke job protection for new recruits in companies with 20 or fewer workers; re-instatement of the capital gains tax on sale of company subsidiaries; a reduction in the federal share of corporate tax from 25 per cent to 22 per cent with effect from 2007; a cut in the top personal income-tax rate cut from 42 per cent to 39 per cent also from 2007; and doing away with automatic overtime pay for weekend work. While she feels inclined to go further on reforms once in saddle, she will need to do a real tight-rope walking.
IG Metall, the powerful auto and metal workers' union has protested, terming her programme "a broad attack on worker rights". People also seemed put off by her choice of Mr Paul Kirchhof as her shadow Finance Minister, who was perceived as a radical reformer, advocating a 25 per cent flat tax.
Mr Schroeder feels convinced that, "We have to reform our welfare state, or it won't be there for future generations". The SPD election programme, unveiled on July 4, talked of higher taxes on the rich, and a minimum wage. A consummate campaigner and mature media savvy, Mr Schroeder, when first elected in 1998, made a tall promise that, if his government did not cut unemployment below 3.5 per cent, it would not deserve to be re-elected. Time and again, he promised reforms, for example, corporate tax cuts and private retirement savings programme, only to see them diluted by Leftist comrades in SPD itself. His Agenda 2010, brought in belatedly in 2003, in his second term as Chancellor, was opposed by many within the SPD.
Even before unveiling Agenda 2010, Mr Schroeder passed pension reform, and cut income and corporate tax rates. In fact, the current signs of economic revival are traced to these reforms. Though trade unions could spell trouble for Mr Schroeder's Agenda 2010, they did not block it. Workers increasingly recognise that union demands for shorter hours and higher pay ultimately kill jobs.
There are, of late, signs of revival: Although Germany recorded 1 per cent growth in the first quarter (January-March 2005) and unemployment fell somewhat below five million, domestic consumption and investment are still lacklustre, and the federal budget deficit keeps skyrocketing.
In 2004, unit labour cost fell 1.1 per cent in nominal terms and Germany emerged the world's biggest exporter: Corporate profits buoyed and production grew at its fastest in a decade. The number of self-employed rose from four million four years ago to 4.4 million at end-June 2005. The "one-euro" jobs (unemployed ones being paid one euro per hour plus benefits) have proved popular, so also "mini jobs" (part-time jobs) paid at euro 400 a month.
What happens in Germany is critical for the rest of Europe as also for the world economy. The Germans who gave the world angst worry about how to deal with the heavy burden history has heaped on them. The September 18 election was expected to be a Richtungwahl — one that would decide which way Germany will choose.
Now, much will hinge on the new formation being inspired by somewhat like the Konard-Adenauer model of deregulation, market regime, and labour market reform for Germany to recapture its elan and urge to be internationally competitive.
Long-term reforms cannot really be set aside or deferred for a simpler and rational tax structure, better schools, more elite universities, and an overhaul of the federal structure.
(The author is former Managing Director, Concor.)
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