Schröder created a second economic supremo alongside Finance Minister Hans Eichel by merging the Economy and Labor ministries and putting Wolfgang Clement, the Social Democratic premier of North RhineWestphalia, in charge of reviving growth and employment. But beyond the political symbolism of Clement’s appointment, the government hasn’t come up with pro-growth policies that might get Germany out of its slump.
Like Schröder, Clement, 62, is a pragmatist who enjoys a solid reputation in the business community. As leader of the country’s most populous state, he has encouraged small businesses and entrepreneurs to fill the void left by the declining steel, coal and engineering industries. And unlike Walter Reister, the previous Labor minister and former IG Metall official, Clement has no direct trade union links. The appointment of a senior politician to the new superministry, as it is dubbed, is “an important sign that they are now getting serious about labor market reform,” says Elga Bartsch, an economist with Morgan Stanley in London.
But Clement, like Schröder and his recent campaign foe Edmund Stoiber, is also a consensus-seeking politician with interventionist tendencies. Earlier this year he tried to broker a deal with banks to save engineering company Babcock Borsig from bankruptcy. “He’s definitely not a firebrand,” says Heinz Schulte, a political analyst in Berlin. “He is a man of the old economy, coal and steel. He will continue to wind down subsidies, but wind them down over the long term.”
The optimism over Clement’s appointment dissipated when the Social Democrats and the Greens, partners in Schröder’s coalition government, agreed on a program that avoided reform of the country’s generous welfare benefits and employment regulations. Instead, Clement’s main job will be to implement a package of useful but limited revisions to the Federal Labor Office that were proposed over the summer by a government commission headed by Peter Hartz, the personnel director of Volkswagen (Institutional Investor, September 2002).
Germany’s budget news grows more grim. Eichel has revealed that Germany will violate Europe’s Stability and Growth Pact this year because of slumping growth. The government won’t publish revised estimates until later this month, but EU officials suggest that the deficit could be 3.5 percent of GDP or more, well above the pact’s 3 percent ceiling.
To ward off EU sanctions, the coalition agreed to tax increases and spending cuts to bring the deficit back under 3 percent in 2003. These changes, however, risk further entrenching Germany’s slow-growth, high-tax environment. The package includes E4.2 billion ($4.1 billion) of tax hikes, including a measure that restricts companies from carrying forward losses from previous years to offset current profits, thus effectively creating a minimum corporate tax.
“The terrible thing about this is the signal it sends: When the corporate sector gets back on its feet, we’re going to tax you big time,” says Holger Fahrinkrug, an economist at UBS Warburg in Frankfurt. “Germany’s reputation as a high-tax, reform-hostile country in the eyes of international investors has been underpinned.”
Schröder has two options. He can join France in trying to weaken the Stability Pact to ease its budgetary constraints. That possibility loomed larger last month after Romano Prodi, president of the European Commission, the EU agency that enforces the pact, called it “stupid” and overly rigid. The problem with this choice is that smaller members of the euro zone, which have complied with the pact and enjoy better growth prospects, adamantly oppose concessions. And judging by the renewed weakness of the euro, financial markets aren’t convinced that EU leaders can develop a better economic policy guideline.
The alternative is for Clement to embark on the tough reform that Germany has avoided. Simply cutting the average period of unemployment benefits from 33 weeks to 22, as recommended by Hartz, would push more people back into the workforce and cut spending by up to E12 billion, estimates Gerhard Fels, director of the Institute for German Business Research in Cologne. As one senior EU official says: “Unless they make reforms, they will not get away from their problem. Potential growth will not go up, and they will continue to fight their budget problems year after year.”
