TCS Daily


Germany's Iron Lady?

By Pierre Bessard - July 14, 2005 12:00 AM

If Angela Merkel's reputation as Europe's next Margaret Thatcher was already shaky, her "government program" for the 2005-2009 legislature ends all pretense. The conservative "chancellor-in-waiting" firmly establishes herself in a long line of barely closeted social-democratic politicians. Former Chancellor Helmut Kohl, who never cared for nor understood economics, would be proud of "the girl", as he used to affectionately call her. With Gerhard Schröder's SPD, Germans had "left of center". With Merkel's CDU they will now have "slightly left of center".

The much-criticized value-added tax increase of €16 billion is about the single concrete measure of significance to be found in the 40-page document. And, quite fittingly, it should be the first to be implemented. The reduction in payroll taxes for unemployment insurance, supposed to offset at least in part the VAT increase, is likely to come later, if ever. The same is true for deregulation. Merkel's program most notably wants to make firing easier. But after the first two years of employment the same old rules would apply. Were we to follow CDU logic, we would conclude that German businesses are so immune to innovation and competition that they never need to restructure after two years.

As another half-baked measure, the CDU intends to restrict the established "right" to work part-time to people taking care of children or close family relatives. As a result, you can expect renewed worker interest in elderly parents in the coming years in Germany. Meanwhile, work will continue to be as expensive as ever, putting off employers, while generous benefits will make sure the average unemployed does not look too soon for a new job. In the last three years Germany lost 1.5 million jobs. With the CDU's program - or more accurately, non-program - it is bound to lose some more.

Behind this unbinding deregulation rhetoric you'll find the real Merkel agenda. Tax "loopholes" are set to be closed and tax "savings plans" discontinued. "So we will achieve far more than the SPD in terms of a just tax system," the program reads. If "just" means "generating more revenues for government", then no quarrel there. All other fiscal measures favorable to growth are "counter-financed" by tax increases elsewhere. For actual tax cuts there is "currently no room". The CDU prefers instead to fight "social and wage dumping" allegedly generated by the EU's new eastern members with "rapid, effective and cross-border controls". So much for the free movement of people and the opportunity for a cheaper workforce.

Social "protection" is equally high on the CDU's list. Parents will get a monthly €50 rebate on old-age pension taxes for each newborn baby. This gesture is deemed an incentive to contribute to "the intergenerational contract in our society" or, translated into English, "the financing of our bankrupt pay-as-you-go pension system". But will €50 a month be enough to push Germans into making more than 700,000 babies annually, half as much as 40 years ago, and saving the pension system? That's a bet Frau Merkel is willing to make. Because there is no plan whatsoever for working longer or curtailing early retirement, let alone for reforming the system into a capitalized one.

Plans to bring German public finances under control are just as ambitious. Only by 2013 would the federal government stop incurring new debt and balance its budget. With a current liability of €1.4 trillion, now or never doesn't seem to make much difference anyway. Nowhere does the CDU question any specific government subsidy, task, or intrusion. The program loses no word on decentralizing financial decision-making at Länder-level, nor does it explain how the current annual deficit of €40 to 50 billion could be reduced or eliminated. Worse still, Merkel's plan includes some pork for Bavaria, the state where the CDU's sister party CSU is anchored: a new Transrapid railway line should bring millions of euros in subsidies to Munich, its capital. But no need to worry: the conservative party also stands for "less noise" and "the diversity of species and plants".

Should it still be unclear, the last hopes of seeing a Margaret Thatcher emerge in Germany at the next election are definitely gone. Angela Merkel's program is that of a defensive politician minimizing risk. Thatcher was a politician of another kind. She was in politics to change her country, and was quite ready to risk power for what she saw as good ends. She was determined to disrupt the British consensus, which had come to the end of its useful life, just as Germany's has. That meant free-market reforms would not be compromised to seduce the mainstream or win in the short-term. The point was not to cajole the political "center", along with elected officials and media, as they go with the flow; the goal was to reverse the whole trend. When Margaret Thatcher said "There is no alternative", it meant to free-market reforms. In today's Germany it means to good old soft socialism. Sadly.

Pierre Bessard is political editor of L'Agefi (www.agefi.com), the Swiss financial daily, and a founder of Institut Constant (www.institutconstant.ch), the free-market think tank.

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