TCS Daily

Margaret Von Thatcher?

By Jeremy Slater - November 10, 2003 12:00 AM

The US economy may be surging ahead with growth in the third quarter recorded at an impressive 7.2 percent, its best performance for nearly 20 years, but Europe's biggest economy is stagnating. In fact, 2003 will go on record as the worst year for Germany since 1993.


To add to this sorry state of affairs the International Monetary Fund recently said that of the world's major economies only Germany would not enjoy any growth this year. Even worse for Berlin is the news, according to a report by the investment arm of Barclays Bank, that on current trends the UK will once again become Europe's largest economy by the 2020s, a state of affairs that has not been the case since the 1890s.


For the past three years Germany's political class has realised that something is seriously wrong with the way the economy has been performing as it moved between mild recessions and stagnation. This has allowed unemployment to rise to 4.2 million, a figure that is predicted to top 5 million next year, and bankrupted the public sector. The conclusion both of the right and the centre-left was that some unpopular measures needed to be taken to sort out the steadily worsening situation. What Germany really needs is its own Margaret Thatcher, someone who by force of personality can push through the kinds of reforms that are now so desperately needed. But is Gerhard Schröder man enough to be Germany's Thatcher?


Until this past spring Berlin seemed to be ignoring the dire situation. It was then that Schröder, who had become the country's most unpopular chancellor since the Second World War, tried to grab the bull by the horns and introduced his proposals for reforming the German economy. However, his party, the Social Democrats or SPD, has a history of vigorously defending Germany's social model, which in the consensual 1950s and 1960s it had helped create. Schröder has twice had to threaten to resign to win support from his own lawmakers. Those on the left are particularly opposed to a freeze on pension payments and any cuts in unemployment benefit.


Winning a vote of confidence at the SPD's party conference in June was not enough. When it came time for the Bundestag, Germany's lower house of parliament, to vote on the package of reforms, Schröder was forced to fly back to Berlin from a European Union summit in Brussels last month to ensure he could win. (How desperate was the situation? Schröder had to ask French President Jacques Chirac to defend Germany's interests. The Imperial Chirac, needless to say, was all too happy to oblige.) With a majority of only four in the lower house, the, retreat from European to domestic affairs was necessary as several SPD members were refusing to support the proposed reforms.


The Chancellor won the vote by demanding that even sick German lawmakers, including one who had cancer, turn up to vote and support him. But his efforts may have been a waste of time. Last week he hit a roadblock when opposition Christian Democrats in the upper house, the Bundesrat, voted against the reforms. Leaders of Germany's powerful states, or Lander, also smell political blood and may try to capitalize on the situation. Although the majority CDU and its Bavarian sister party Christian-Social Union support the proposed cuts in income tax, with the top rate being reduced from 48 percent to 42 percent and the bottom from 19 percent to 15 percent, they want to toughen the unemployment proposals by demanding that the jobless take employment at below the minimum wage. Germany's powerful trade unions, however, will oppose this provision and probably call for major strikes.


Economic experts remain cautious about the effect the reforms will have on the economy. They say Schröder's Agenda 2010 package is a move in the right direction, but that it is only a start to what is needed to transform the country's economic performance. "It might be one giant leap for social democracy, but it is a small step for Germany," said one. They point out that the proposals come after 20 years of lawmaking that has made running a successful business in Germany very difficult. "The reforms are helpful, but this is only just the beginning of what needs to be done," said another.


The same economists also doubt whether the SPD has the appetite for a further round of much-needed reforms. They also fear that after his proposed Agenda 2010 is agreed upon Schröder may try to play to the left again, and specifically the trade union audience, in the hope of gaining its support for his re-election campaign in 2006. Sound familiar? More like Germany's Bill Clinton that its Margaret Thatcher.

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