Germany 2004: The Road to Reform

Many people consider it a four-letter word, even though it actually has five of them, plus a Roman numeral -- Hartz IV, the name of the latest package of welfare and labor market reforms that have been at the center of sharp-edged political debates and noisy street demonstrations during the past year.

Hartz IV has even entered the national lexicon, having been designated the "word of the year" by the GfdS, the German Language Society.

The reforms, part of the German government's overall "Agenda 2010" package and to go into effect on Jan. 1, are aimed at loosening labor market regulations and trimming welfare benefits, two developments that many analysts say are necessary if Germany wants to emerge from its economic stagnation, compete in an increasingly globalized world and maintain the sustainability of its welfare state.

The core of the reform includes substantial cuts to benefits provided to the long-term unemployed. In theory, lower payouts from the government will encourage the jobless to accept work that is offered to them, even if it is low paid.

The government wants to put a dent in Germany's stubborn -- and growing -- unemployment rate, which is now at nearly 4.5 million. More than 10 percent of the population are registered as out of work. In some areas in eastern Germany, that number is almost double.

Angry populace

But the reform plans have triggered anger among many Germans, particularly those in the former East Germany, who complain that jobs are simply not available in a region which is structurally weak and has yet to catch up with the more affluent west.

Already incensed by cuts in health benefits that took effect at the beginning of 2004 and freezes in pension levels, tens of thousands of bitter Germans took to the streets during August and September in so-called "Monday demonstrations." They were modeled on similar protests in the east in 1989 that led to the collapse of the East German government.

They complained that the government was dismantling the cherished German welfare state and would end up driving many into poverty. The Social Democratic-Green government coalition watched as its approval ratings fell to all-time lows during the protests.

Despite the anger, however, the protests petered out at the end of September when the demonstrations failed to ignite similar passion in western Germany.

Health cuts

While the preparations and finishing touches on the Hartz IV reforms got the lion's share of public attention in Germany, another reform program had already gone into effect in January. In the summer of 2003, the government had decided on a revamp of the nation's expensive health care system.

The reforms, aimed at reducing the costs of a system heading toward insolvency, cut back on some services, such as those for dentures and health spa visits, and required patients to pay for medicines that were previously covered by public health plans. Patients were suddenly required to reach into their wallets when visiting the doctor's office, since a €10 ($13.60) fee per quarter was imposed.

In the beginning, the German media was full of reports of elderly, disabled or chronically ill people who could no longer afford the medical care they needed, or of the difficulties in administering the fee payment system at doctors' offices.

But, the furor soon died down. This week, Health Minister Ulla Schmidt, who was once among Germany's least-liked politicians because of the reforms, said she was satisfied with their effects over the past year, since required payroll contributions were kept under the 15 percent mark and the new office fee reduced the number of unnecessary visits to the doctor.

"No one can say anymore that the system has broken down," she said, although analysts argue that its long-term survival will likely involve more cuts.

Pulling up the rear

Although German Chancellor Gerhard Schröder has repeatedly said he is committed to his slew of reforms, Germany is trailing among European welfare states which have changed their system in response to the changing times.

Sweden, for years held up as the model of a state providing its citizens cradle-to-grave benefits, embarked on a far-reaching deregulation program in the 1990s. It reduced the number of state-owned companies, increased the amount of privately managed social services and deregulated the telecommunications, postal and railway networks. Its unemployment rate was 5.8 percent in September.

Denmark also went through a radical liberalization of its labor market, making it much easier to hire and fire employees.

"Danish companies are more willing to hire new employees in times of economic revival than their European competitors, who have trouble letting off workers when the economy goes downhill again," the Danish Confederation of Trade Unions has said in an official statement, words which one will certainly not hear from a German union.

The result has been an unemployment rate of 5.3 percent, well below the 8.9 percent average in the European Union, not to mention Germany's rate of over 10 percent.

Change or die?

A report by the European Economic Advisory Group (EEAG) on the European economy in 2004 said the overall picture of reform efforts in Europe suggests that those countries which have been slow to liberalize, such as France, Germany and Italy, have not managed to reduce unemployment rates. The report also said smaller countries have an easier time liberalizing policies than larger ones.

Despite the protests from German citizens that Berlin's reforms are hammering the final nail in the welfare state's coffin, Chancellor Schröder has insisted that the system's preservation is one of the most urgent issues facing Europe.

In a speech he gave this summer, he said the challenges of globalization and an aging society left Germany no choice but to reform the system. He rejected accusations that the reforms were unfair to the poor and vulnerable in society.

"Fairness is what will benefit our children and children's children and help preserve the welfare state," he said.