German Industry Not Amused by Coalition Deal

The head of the Federation of German Industries (BDI), Jürgen Thumann, is not going quite as far as some of his colleagues, who have heaped criticism on the policy roadmap thrashed out by the conservatives and Social Democrats last week.

All things considered, Thumann says, the power-sharing pact is a continuation of the reform course set under Gerhard Schröder's government.

It still won't stir the economy back to life, nor will it see the immediate creation of new jobs. But the deal does contain a hint of promise that things will gradually get better in Germany within the next four-year term of the new government, he said.

Criticism, but for different reasons

But, that's where the good news ends. Many industry leaders are skeptically eyeing the coalition deal, while others complain that it's simply headed in the wrong direction.

The trade unions, in particular, are angry. The planned hike in value added tax (VAT, or sales tax) is one target of their ire, the other includes measures to loosen Germany's strict laws protecting employees from dismissal.

Though nothing fundamental will change about existing job protection legislation, companies will in future be able to keep newcomers on a trial period for longer -- for two years instead of the current six months.

Hans Eberhard Schleyer, head of the Association of German Trade, said the planned reforms don't go far enough.

"Increasing trial periods to two years may be a step in the right direction, but one has to wait and see," he said. "Essentially, much more has to happen in terms of labor market reform than is laid down in the coalition deal."

Raising retirement age controversial

Another point of the coalition deal, an increase in the retirement age to 67 from the current 65, has also proved controversial.

Walter Hirrlinger, head of the Social Association VdK, said he was against freezing pension hikes for pensioners and raising the working age of employees. Hirrlinger warned the government that it would face a wave of strikes and protests.

"When you consider that raising pensions is put off indefinitely and that pensioners can increasingly spend less each year at a time when the inflation rate is over 2 percent, then you can't say that it's really very fair for them (pensioners)," he said.

However, raising the retirement age has been strongly welcomed by business leaders.

Half-hearted measures?

At the same time, some like Dieter Hundt, head of the employers' association, pointed out that most of the measures are half-hearted and stop short of a "real bold stroke."

"With tax and social contributions hikes, we're not going to contribute towards stimulating economic growth, holding on to jobs and creating new ones in Germany," Hundt said.

The bleak sentiment was echoed in Germany's struggling retail sector, which has for years been suffering from Germans' tendency to save for a rainy day rather than splurge.

Hubertus Pellengahr, spokesman of the Retail Association said that floundering consumer confidence in Germany would be further dampened if the VAT hike came into effect, pointing out that it would cost the economy some 24 billion euros ($28.2 billion).

"We're happy that the VAT hike will only come into force starting January, 2007," Pellengahr said. "That gives us enough time to correspondingly adapt prices. It's better to increase VAT in one go, rather than spread this 3-percent hike over a longer time frame."

Economists slam purpose of VAT hike

Indeed, much of the criticism about the future government's policy blueprint is centered on the VAT hike.

But, a look at Germany's neighbors shows that the country's current rate of 19 percent VAT is modest in comparison. In Sweden and Denmark, sales tax touches 25 percent.

The biggest complaint from economists is that the additional revenues generated by the VAT hike are to be used to plug gaping holes in public finances and bring down Germany's ballooning budget deficit rather than to lower non-wage labor costs.