TCS Daily

Payback Time for Schroeder

By Jeremy Slater - December 4, 2002 12:00 AM

The perennial favourite German children's story Emile and the Detectives begins with our eponymous hero falling asleep on the train while travelling across Berlin and having the money his mother had given him stolen. Much of the rest of the story involves Emile and a gang of friends hunting down the perpetrators.

German voters can relate. After having been lulled into a false sense of security and sleepwalking through the country's recent national elections, they have woken up and now are after the man who is threatening to take away their hard-earned cash with higher taxes.

They are not in a forgiving mood, as Gerhard Schroeder's election victory in September appears to be nothing but ashes. Only two weeks ago it was reported that his Social Democratic (SPD) party's ratings had fallen from 38.5% to 34.0%, the swiftest decline in popularity of a newly elected chancellor since the Second World War.

More recent polls show the SPD falling further into the mire with a score of 26%, while its main rival the Christian Democrats are at 56%. The CDU registered 38.5% in the September vote, but its alliance parties did less well than the SPD's ally, the Greens, hence Schroeder was able to form a government.

Such is the foul mood in the country that popular comedian Elmar Brandt's record "Der Steuersong" (the tax song) lampooning Schroeder has climbed to the top of the charts.

The problem for the chancellor is that he is struggling with two thorny issues. Firstly, the German economy is growing very slowly and, despite earlier predictions of 1.5% expansion this year, the growth rate is likely to be 1% at best.

Secondly, because of the downturn government spending has increased as it does in most recessions, as social security costs rise, and Germany has overshot the EU's 3%-of-GDP limit on all public investment. Berlin has been asked by the European Commission to reduce this to less than the target set by the EU's Stability and Growth Pact.

As a recovery is not in sight the German government has to increase taxes, something which most economists would advise against at this moment in the cycle, as a cut would stimulate consumer and industrial demand.

"The Germans are in hell now," says Stefan Brill of the European Policy Centre, a Brussels-based think tank. "The difficulty is that you do not know what the outcome of these tax proposals by the SPD will be as they have to go through the Bundesrat. The Christian Democrats are also saying that Schroeder hid the truth during the election and this is the charge the electorate seems to believe."

Germans are likely to be hit by tax increases in social security, energy and financial services. There's even a proposed "wealth tax". All of these are, not surprisingly, very unpopular, and the SPD is likely to suffer in upcoming local elections in Hessen and Lower Saxony.

"There is no medium or long-term strategy or any big concepts for solving these problems and that goes for all parties," says Brill. "The government thinks or hopes they will reach the 3% target and their only hope is economic growth. At the moment they seem to want to get money from anywhere."

In addition to this feeling of policy drift, economic observers also worry that Schroeder is too beholden to the trade unions. The accusation is that he sought out their support for his re-election campaign, but has not being able to distance himself from them since then.

"I think it was good that the government has tried to obey the Stability and Growth Pact limit of 3%, but not by raising taxes," says Ulrich Schroeder, head of economic policy at Deutsche Bank. "This is bad as it depresses the mood of the people and depresses the climate. What we need is policies that encourage growth."

The economist suggests the government should have sought to reduce its spending rather than raise taxes. He argues this should have been in the areas of subsidies and social security transfers.

"But the SPD will not do this because of its links to the trade unions. The unions fight for those who do have jobs, but forgets about those without; hence we have a 10% unemployment rate and no growth in the economy for two-and-a-half years," he says.

Brill added that the first Schroeder government should have taken the opportunity to cut spending when the times were good, but it failed to do this.

On an EU level he suggests that when a eurozone country cuts spending below 3% it should be obliged to introduce structural reforms. He says that these could, perhaps, be introduced by the national central banks "because they need a new role".



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