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Germany: New Government Faces Tough Challenges

Munich, 29 October 1998 (RFE/RL) -- Germany's new center-left government begins formal work today with many hoping to hear more about its policies on unemployment and improving business opportunities.

German political commentators say they remain uncertain of the direction which will be taken by the new chancellor, Gerhard Schroeder, and his coalition of Social Democrats and Green environmentalists.

The government's main goal is to reduce unemployment, which remains stubbornly high at around 10 percent of the workforce. Its main focus will be in the five provinces which formed the former communist East Germany. In some parts of eastern Germany, unemployment is as high as 17 percent of the workforce.

Industry and business insist that the government must cut taxes and take other measures to enable Germany to face growing competition around the world. They argue that a more competitive Germany will also open up the labor market and create more jobs. Germany's corporate taxes are among the highest in the world, with a top level of 53 percent in some cases.

A study on where countries stand in regard to global economic competition was commissioned earlier this year by the World Economic Forum in Switzerland. Germany placed 24th, well behind the United States, Britain and even the Netherlands, which came in 7th place.

One of those who carried out the study, U.S. economist Andrew Warner of Harvard University, said recently that Germany could return to the top 10 in competitiveness if it reduced taxes for business and industry and eliminated some of the rules protecting German workers. Industry and business have long claimed that these rules help make German goods expensive.

Schroeder and his powerful finance minister, Oskar Lafontaine, have not been specific about the measures they will take to revive Germany's competitiveness and create new jobs.

The left-leaning Lafontaine has promised a series of tax cuts intended on the one hand to reduce the burden on industry and business and on the other to give the ordinary worker slightly more spending money. But the tax cuts will come in stages through the year 2002, with the biggest ones coming at the end. That means the biggest tax benefits will come just before the next elections.

And Lafontaine has said that before any tax cuts, he first plans to eliminate tax loopholes which, in the government's view, benefit only the rich. During the election campaign, Lafontaine frequently criticized rich businessmen who allegedly paid less tax than low-paid workers because of tax loopholes. The Association of German Industry has responded by claiming the loopholes are necessary to give "breathing space" for major companies suffering under the tax burden.

Gunter Albrecht, the chief economist for the Associaton of German Industry, told a televison interviewer this week that industry was disillusioned by what it had heard of the new government's program and promised to oppose it. He said, "Industry is very angry because it believed the new government would substantially cut its tax burden."

Albrecht said industry had placed its faith in Chancellor Schroeder, who is considered to be more pragmatic and had promised to modernize the Social Democratic party and lead it away from left-wing policies towards the middle. Industry claims he has failed to stand up to Lafontaine, who epitomizes more traditional left-wing policies.

Most commentators say the biggest obstacle to change in Germany is the inflexibility of the labor unions, which are determined to maintain existing job protection rules and other measures including six-week annual holidays and generous health benefits. Some German labor unions are already demanding a 6 percent wage increase despite the turmoil in the world economy. The cost of labor in Germany is already among the highest in the world at around $32 an hour, when all benefits are taken into consideration.

Militant German unions who take to the streets march under banners warning that strikes could close down most of the nation's industry. One of the most common proclaims: "If this strong arm so wishes, the wheels will not move." A recent survey on labor flexibility placed Germany in 51st place among 53 countries.

A political analyst, Lutz Muller, said this week that domestic policy was the most important issue for Schroeder's new government and described it as an "unenviable task." Muller, who specializes in industrial issues, said it would be difficult for any government to cut back the rights and protections enjoyed by German labor. He said it is particularly difficult for a Social Democratic government which is pledged to support labor. The apparent differences between the modernizing, pragmatic Schroeder and his left-leaning and politically-powerful finance minister will not make it easier.

But even Muller conceded that the first working day of the new government is too early to become skeptical about the challenges it faces. He said that "in six months many of these apparent problems may have eased," adding, "the government is pledged to institute reform and it has four years to do so."