Schröder Urges Reform as Government Cuts Growth Forecast

In an attempt to impose discipline on left-wing members of his Social Democratic party (SPD), Schröder said those opposed to his “Agenda 2010” package of social reforms were endangering his ability to govern.

“Anyone who wants to vote for or push through anything else has to know that they are removing the foundation of my work and are forcing me to deal with the consequences,” Schröder told journalists before a meeting with SPD leaders in Berlin.

The party leadership voted to back the government’s reform agenda at a special SPD congress to be held on June 1. The reforms, which aim to cut unemployment benefits and make it easier for firms to hire and fire, have encountered massive criticism from trade unions and the left-wing SPD hardliners. Four members of the SPD leadership voted against the proposals at Monday’s meeting.

Refusing to back down

Having staked his political future on the implementation of Agenda 2010, Schröder refused to placate the left-wing hardliners: “There is no reason to think about changes.” In an attempt to build more momentum for his reform proposals, Schröder will hold the first of four regional SPD conferences in Bonn later on Monday.

Germany’s economy has in recent years ground to a halt under the weight of its generous welfare system and constricting labor market policies. Economic growth slowed to only 0.2 percent in 2002, its lowest annual rate since a recession in 1993, and German unemployment is running at around 11 percent.

As if to highlight the urgency of undertaking the painful reforms, Schröder’s government on Monday also cut its official growth forecast for 2003. Instead of its previous forecast of 1 percent, the Economy Ministry now expects Europe’s largest economy to expand only 0.75 percent this year.

The slower growth makes it more likely that Germany will not meet the European Union's 3 percent budget deficit target in 2003 for the second year in a row.

Still seen as too high

But the downward revision is still higher than more pessimistic forecasts from the International Monetary Fund, the OECD, European Commission and Germany's six leading institutes, which expect the economy to expand between 0.3 and 0.5 percent in 2003.

“This (government) forecast is irresponsible considering the actual economic developments and the continuing economic and finance policy mistakes,” Rudolf Hickel, the director of the European Economic Institute in Bremen, told the German news agency DPA.

The official revision came as Germany's closely-watched Ifo business climate index unexpectedly fell in April despite the end of the war in Iraq which had been expected to boost sentiment. The Munich-based Ifo economic institute said the index dropped to 86.6 from 88.1in March, as firms remained skeptical over the prospects for the coming months.

In further gloomy news, credit insurer Hermes said on Monday there was likely to be record number of bankruptcies in Germany this year. The subsidiary of financial services giant Allianz said it expected around 44,000 firms to declare insolvency in 2003, the highest level in 12 years. Losses from insolvencies are expected to total around €50 billion ($ billion).