Experts Doubt Reform Deal Will Jump-Start Economy

Talking about Monday’s compromise on tax and welfare reforms, German Chancellor Gerhard Schröder called it “an absolutely respectable result.” His opponent, Christian Democratic Union (CDU) leader Angela Merkel, said that it gave Germany every option for growth.

The agreement, reached after three days of secret negotiations in a parliamentary mediation committee, doesn’t look like the government’s original plans.

Instead of leaving an extra €15.6 billion ($19 billion) in workers’ pockets, the tax cut now only amounts to €7.8 billion.

The cut reduction is the result of dogged negotiating by the CDU and its sister party, the Christian Social Union. Both were against a massive tax cut because they said it would increase borrowing and the German national debt.

The opposition also pushed the government into encouraging legislation that will loosen hire and fire laws in Germany, a major stumbling block for foreign investors.

“This agreement is a very bad decision for those affected by it,” said Michael Sommer, the head of the German Trade Union Federation. He added that an additional 2.8 million employees would now lose their protection against getting fired.

Opposition leaders didn’t succeed in throwing out the system of industry-wide collective bargaining, vigorously defended by trade unions who traditionally support Schröder’s Social Democratic Party.

Too little too late?

The financing of the tax cut had been a major stumbling block in negotiations between government and opposition, which didn't want to ratchet up the national debt in order to finance tax cuts. Now most of the cut, an estimated €5.3 billion, will be paid for by privatizing state property. Additionally, subsidies for commuters and home-owners will be reduced.

Because of the subsidy cuts as well as increased health care costs, many Germans will not end up with much more money in their pockets come January, economic experts said.

“This isn’t going to help any more,” said Herbert Buscher of the Halle Institute for Economic Research, adding that he didn’t expect to see any effects of the tax cuts until next fall.

Small business representatives agreed. “These tiny reforms won’t lead Germany out of the crisis,” said Hermann Sturm of the Union of Small-Business Owners.

Big boost to economy unlikely

While German Labor Minister Wolfgang Clement said he expected the reforms to boost the economy by 0.2 to 0.6 percentage points, others doubted that recovery would happen quickly.

“This was a long sprint for such a short leap,” said Klaus Zimmermann, the president of the German Institute for Economic Research in Berlin. “It is neither a strong signal for economic recovery nor long-term structural reforms.”

Municipalities welcome extra money

But the compromise did draw praise from local government leaders, who stand to see more funds flowing into their empty coffers.

Finance directors in Germany's municipalities will have an additional €2 billion in 2004, according to Gerd Landsberg of the German Association of Municipalities. “This will give us some breathing space for desperately needed investments,” he said.

Germany’s two parliamentary chambers, the Bundestag and the Bundesrat, still have to vote on the compromise in the coming week for it to become law on Jan. 1.