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Germany: Schroeder Fights To Push Through Welfare Reform Package

  • Breffni O'Rourke

German Chancellor Gerhard Schroeder has staked his political life on the passage of reforms designed to overhaul the country's expensive welfare system and pensions, and to liberalize the labor market. So far, Schroeder has been able overcome opposition to his plans, even from within his own Social Democratic Party. But will he survive, and if so, are his measures -- collectively called Agenda 2010 -- the right ones?

Prague, 21 October 2003 (RFE/RL) -- Commentators are calling Chancellor Gerhard Schroeder's welfare reform package the biggest overhaul to the German welfare system since the days of Otto Graf von Bismarck.

Key sections of Germany's generous support system are being changed -- jobless benefits are being reduced, more of the burden of pensions will have to be carried by individuals, health care costs are being streamlined, and, on the labor market, workers will be made easier to hire and fire.

The reforms are designed to help Germany cope with the new realities of stagnant economic growth and an aging population in a global business environment that has become increasingly competitive in the last decade.

Schroeder is doing what politicians always hate to do -- namely, facing up to measures highly unpopular with voters. Some of the strongest opposition to the reform package has come from within the ranks of his own Social Democrat-Greens coalition, and he has quelled a possible mutiny only by threatening to step down unless his reforms are passed in parliament.

Schroeder expressed satisfaction on 17 October when the Bundestag, the lower house, voted on part of the package -- namely, for cuts in unemployment benefits, extra duties on tobacco, and cuts in income tax worth almost 16 billion euros ($18.7 billion). "I am happy about the result of the vote," he said. "It shows that the governing coalition is united when it comes to modernizing Germany. We need this ability to act so we can give our country a good future."

Now, however, a new and difficult chapter begins. Any reform measures passed by the Bundestag must go to the upper house, the Bundesrat. And that is controlled by the conservative opposition parties, which have threatened major changes to strengthen the package.

If such changes are unacceptable to the left wing of Schroeder's party, the chancellor may yet find himself sitting amid the wreckage. He is appealing to the Bundesrat not to allow that to happen. "It is up to the majority of the Christian Democratic Union in the Bundesrat not to blockade the process of modernization," he said. "I am confident the conservatives will use their majority in the Bundesrat responsibly and not put at risk the future of our country for the party's political gain."

As Adrian Ottnad, a senior analyst with the Institute for Economics and Society in Bonn, sees it, political realism is likely to win out in the end. "All parties know that something has to be done, and I believe there will be some compromise at the end, because also the opposition cannot afford to totally oppose these attempts by Chancellor Schroeder. On the other hand, the window of opportunity will soon close because starting next year, there are several elections, so there will be not much space to complete reforms," Ottnad told RFE/RL.

Those elections in German constituent states do not directly affect the life of the federal government, but if Schroeder's coalition parties fare badly in them, the opposition's hand in the upper house will be strengthened.

Ottnad, however, is not impressed with the content of the government's reform package. He said it confuses long-term and short-term goals. "There is still a lack of a concept, a lack of an idea how to bring things into a long-term sustainable perspective," he said.

Another analyst, Stefan Bielmeir of Deutsche Bank Research in Frankfurt, said this is only the beginning of the reform process in Germany. But he praised the labor reforms as a good way of sparking new economic activity in Germany and getting unemployed people back to work.

He cited the new concept of "mini-jobs" and "midi-jobs," in which people can be quickly put to work but also quickly let go if there is a downturn. In a mini-job, earnings may be up to 400 euros ($468) a month, and in a midi-job, 800 euros per month.

As for pensions, Bielmeir said new proposals announced over the weekend are a short-term stabilization measure, and more steps will be needed in the future as the burden of financing the pay-as-you-go system falls more and more heavily on a shrinking number of active workers.

"We need here more structural reforms, and the government has decided to implement some [further] reforms, which will make the whole [pensions] system more stable. But nevertheless, what we need is more employment. Employment growth is necessary to make the system stable, and as long as we have such a high rate of unemployment here in Germany, the system cannot work," Bielmeir told RFE/RL.

The German public has not taken kindly to the reform process, with harsh reactions from many quarters over the weekend. But one piece of good news is that Germany has once again become the world's largest exporter. Bielmeir said that indicates among other things that the government's policy of containing the growth of labor costs is paying off. "We have defended our market share in recent years," he said. "We have [even] enlarged our market share, in all major countries, including the euro-zone. We still produce good products."

The process of reform is under way in an economy that used to be the powerhouse of Europe. The Schroeder government will need determination and skill to carry it through to its conclusion.