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Germany: Government Expects Potholes In Road To Reforming Its Economy

German Chancellor Gerhard Schroeder said today that the primary goal of his new government is to revive the sluggish economy and cut unemployment by creating new jobs. But the announcement of the government's plans were accompanied by an admission that, because of the slumping economy, Germany is about to breach the rules underpinning the euro currency by running a deficit of more than 3 percent of its economic output.

Munich, 17 October 2002 (RFE/RL) -- Getting Germans back to work and stimulating the lagging economy are the main goals for Social Democrat Chancellor Gerhard Schroeder in his second term of office.

But both Schroeder and his foreign minister, Joschka Fischer, told journalists today that success will require changes that will be unpopular with many Germans.

Fischer told journalists today that the next four years will be beset with difficulties but added that the situation also offers opportunities that must be seized for the benefit of the nation: "Four difficult years lie before us. At the same time, they are also years which offer us many opportunities -- years which we must be energetic in shaping. It will be anything but easy."

The coalition program presented by Schroeder and Fischer after more than two weeks of negotiations focuses on domestic problems, particularly unemployment and ideas for stimulating economic growth. Despite recent improvement, unemployment is still hovering around the 4 million mark, or about 9.5 percent of the work force. Economists have said several times recently that growth this year in Germany's gross domestic product, or GDP, may only barely reach the official target of 0.75 percent.

The government's policies for dealing with the budget problems include tightening tax rules, cuts in spending, and an increase in debt. In the fight against unemployment, Schroeder is relying heavily on proposals made earlier in the summer by the so-called Hartz Commission, which Schroeder says will be introduced in full.

Some government officials predicted earlier this year that labor-market reforms suggested by the Hartz Commission could halve unemployment in three years.

Implementation of the Hartz proposals are the responsibility of the new so-called super minister for labor and economics, Wolfgang Clement. Commentators say much of his success will depend on his willingness to take on vested interests -- including trade unions, most of which are conservative and unwilling to accept change.

The coalition program also focuses strongly on the need to improve family values, including more kindergartens and more assistance for families wanting to buy their homes. Better education is also high on the list. This reflects the government's dismay at Germany's poor showing earlier this year in an international investigation into the scholastic abilities of 15-year-olds. Germany placed 21st out of the 32 industrialized countries that participated.

Schroeder today described the program for the next four years as challenging: "So that's it: A demanding program, but one which is realistic and which can be realized step-by-step -- and [one which] will be realized."

Government spokesmen said little change is envisaged in defense and foreign policy. In answer to questions, they said the government stands fast on its decision not to support a possible U.S. offensive against Iraq.

A spokesman recalled that Schroeder said in December 2001 -- just a few months after the terrorist attacks in the U.S. --that his government would not support expanding the war against terrorism into an offensive against Iraq or other countries. He said nothing has changed since then.

The government acknowledged today that its new term has started badly because its budget deficit this year is expected to exceed 3 percent of GDP. This breaches the European Union's financial stability pact, which is enshrined in the 1992 Maastricht treaty.

German Finance Minister Hans Eichel said today he doesn't think it is possible for Berlin to stay under the 3 percent deficit limit. He blamed the slumping economy, which has lowered tax revenues much more than expected. The finance minister said he will not know the actual size of the deficit until tax estimates are made next month.

Germany's failure to meet the Maastricht conditions could lead to fines and other penalties being imposed by the European Union. If strictly applied, the fines could amount to billions of euros. However, Germany will be given time to show that it is lowering its deficit, which might allow it to avoid any fines.

Portugal has also violated the Maastricht criteria and is also facing a fine from the European Commission. France said recently that it also expects to breach the rules this year. However, the other eight countries that share the euro have budgets which are close to being balanced or even have surpluses.

The news that Germany is unlikely to meet the Maastricht criteria led to sharp criticism of the government's proposals by business and financial experts. They argue that the reforms in the coalition program don't go far enough toward producing an upswing in the economy. They believe the government has not faced the problem of breaking or limiting traditional customs and structures, which have weakened Germany's competitiveness in the modern world.

Dirk Schumacher, who is an analyst at Goldman Sachs in Frankfurt, said today: "We are disappointed. We had expected much clearer signals that the government really wanted to change the traditional way of doing things."

The president of the Employers Federation, Dieter Hundt, also said the coalition agreement does not tackle structural reform and predicted that it could push non-wage labor costs even higher than they are now.

But Schroeder remains confident. "In four years, we will have turned the economy around," he said today. "We will be in the forefront of Europe."