EurWORK European Observatory of Working Life

Chancellor proposes Agenda 2010 to revive economy

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In March 2003, the German Chancellor, Gerhard Schröder, outlined to parliament his domestic reform plans, known as Agenda 2010, in four main areas: relaxing, but not abandoning, rules protecting workers from dismissal along with other labour market reforms; modernising the social welfare state; decreasing bureaucracy for small businesses and allowing crafts workers to launch new business ventures; and providing new low-interest loans to local authorities. The main employers’ organisations see these as key areas in which action is long overdue, and have offered broad support for the Chancellor’s aims, albeit mixed with disappointment that they do not go far enough. However, trade unions rebuked Mr Schröder for his 'socially unbalanced' reform proposals. The key question now is whether the Chancellor can gain support, in particular from the union-dominated left-wing of his own SPD party, for his proposals.

On 14 March 2003, the Federal Chancellor, Gerhard Schröder, delivered a much-anticipated government policy statement in the lower house of parliament (Bundestag) under the heading 'Courage for peace and courage for change' ('Mut zum Frieden und Mut zur Veränderung'). Concentrating mainly on his domestic agenda, he presented a programme of economic and social policy reforms designed to reinvigorate the stagnating German economy.

Mr Schröder asserted that a massive effort from all sections of society would be needed to restructure in a fundamental way the nation’s job protection and wage bargaining regulations, unemployment and social welfare benefits, and health and pension systems. Additionally, he announced plans to ensure that enough vocational training opportunities are made available. The Chancellor also made known his intentions to relax the rules governing crafts workers' qualifications, and to release EUR 15 billion in low-interest loans to local governments. These areas are to be extensively restructured within the framework of a reform programme for Germany known as 'Agenda 2010', a title which echoes the ambitious goal of the Lisbon European Council summit in March 2000 (EU0004241F), when EU leaders set out to make Europe 'the most dynamic economic area in the world' by the end of this decade.

Prior to this 'state-of-the-nation' speech - in which the Chancellor focused on his own solutions for job creation after having failed to reconcile trade unions and employers’ groups on this issue (DE0302104N) - there had been numerous calls for reform. Among others, Germany’s central bank, the Deutsche Bundesbank, publicly called for tough reforms to prevent a long-term slide in Germany’s prospects, in a paper entitled 'Ways out of the crisis. Some points to consider for economic policy in Germany' ('Wege aus der Krise. Wirtschaftspolitische Denkanstöße für Deutschland') released in early March 2003.

Reform plans in detail

The Chancellor praised the recent 'Hartz' reforms, which include a restructuring of the Federal Employment Agency (Bundesanstalt für Arbeit, BA) (DE0209205F) as well as a cut in labour taxes on 'minor jobs' (DE0302105F), as a success in his speech on 14 March. However, he announced additional changes that go further than the Hartz reforms. These additional reforms will, it is hoped, increase the flexibility of the labour market.

The new plans will affect labour market regulation directly and restructure the welfare state quite radically in order to improve incentives and lower costs. This is seen as vital, as the labour market and the welfare state are strongly linked. On the one hand, a rigid labour market with strong employment protection normally results in higher wages for 'protected' workers as well as higher unemployment among other groups; this additional unemployment, in turn, lead to an increase in the welfare state budget. On the other hand, the German social security system is financed through payroll taxes and, hence, boosts labour costs and decreases employment. Finally, the level of welfare benefits and welfare assistance, as well as eligibility conditions for them, determine incentives to work: a more generous system results by and large in lower employment. Therefore, it is argued, more hiring needs to be encouraged by a balanced deregulation of the labour market and reforms of the welfare state which will lower labour costs and increase incentives to work in the regular labour market (as opposed to the clandestine labour market).

Employment protection

On the issue of labour market deregulation, Mr Schröder stated that employment protection legislation needed to be made more flexible even though, in principle, he regards Germany’s job protection law as 'part and parcel of the German social market economy system' and as a cultural and economic achievement. The Chancellor stated that, in future, businesses with up to five employees will be able to hire temporary workers (from temporary employment agencies, as well as on fixed-term contracts) without these workers counting towards the five-employee workforce-size threshold for the application of rules on protection against dismissal s. Moreover, he offered workers who lose their jobs as a result of economic changes in firms (betriebsbedingte Kündigungen) a choice between a redundancy compensation payment fixed by law or bringing a legal case seeking re-employment. The aim of this proposal is to make dismissals easier and decrease the number of unpredictable legal cases.

Furthermore, the social criteria for redundancy (Sozialauswahl), which regulate which employees have to be dismissed first if a business downturn calls for redundancies, will be defined less rigidly in order to make it easier for firms to retain their most 'dynamic' employees (if these are also, for example, single and without children) if they have to make some workers redundant. Whereas marital status, age, tenure and dependents currently determine who will be made redundant, in the future, employees’ qualifications, performance and responsibilities will be taken into account. Works councils will still have a role in determining which workers are to be dismissed.

Collective bargaining

With regard to collective bargaining rights, the Chancellor asserted that co-determination rights and industry-wide collective bargaining agreements will not be affected. He maintained, however, that it will be absolutely necessary 'that options be created within collective bargaining agreements designed in order to give alliance partners room for manoeuvre'. The federal government expects labour and management to reach agreements on such 'in-house alliances'. If this is not done, appropriate legislative action will be taken, he said.

Training

The Chancellor issued a further threat with regard to vocational training opportunities. According to Mr Schröder, the federal government has various support programnmes aimed at ensuring that young people are given training and employment opportunities. He complained, however, that, while, 'a third of all companies provide training, 70% of companies shirk their responsibility to society'. He indicated that, if industry fails to fulfil this duty, he could not rule out the possibility that a training-related tax would be imposed in 2004.

Unemployment benefit and social security

Regarding social security reforms to increase work incentives and to lower labour costs, the Chancellor announced that unemployment and social welfare payments will be merged, with unemployment assistance, which is paid after entitlements to higher unemployment benefit, be reduced to roughly the same level as social aid. He stressed that people who are able, but unwilling, to work in acceptable jobs will face sanctions. He also announced that the eligibility period for unemployment benefit will be decreased. Unemployment compensation, which amounts to roughly 67% of former net wages for people with at least one child and 60% for those without children, will be limited to 12 months for people under the age of 55, and to 18 months for those over the age of 55. Unemployment benefit can currently be claimed for up to 32 months. The Chancellor emphasised that many people, including himself, would not be enthusiastic about such reforms; however, he added that the cuts should help create an incentive for people to accept jobs. Furthermore, these reductions in benefit levels and eligibility periods are intended to reduce the level of non-wage labour costs, which are among the highest in the world.

The same holds true for plans to reform and renew Germany’s overburdened social security system. The Chancellor singled out the statutory health insurance system as the area most in need of reform and announced a raft of specific measures (eg private provision for sick pay) to lessen the burden of high costs and decrease additional labour costs while maintaining the basic solidarity principle that each and and every person is entitled to receive the medical care they need regardless of age and income. The Chancellor, on the basis of the proposed regulatory changes, expressed confidence in his government’s ability to reduce statutory health insurance contributions by 1.5 percentage points to less than 13% of pay.

Small businesses

With a view to the small business sector, Mr Schröder announced that, in the future, it will be possible for experienced crafts workers with 10 years’ work experience to start up their own business without having a master crafts worker qualification. In addition, he announced that tax regulations for very small businesses will be radically simplified, book-keeping requirements reduced, and taxes lowered. In particular, a new Small Business Act is intended to deregulate the complicated procedure of setting up an enterprise by simplifying the bureaucracy involved.

Local government

Finally, the federal government wants to strengthen the financial and investment capacities of local governments by releasing EUR 15 billion in low-interest loans, mobilised through the Reconstruction Loan Corporation (Kreditanstalt für Wiederaufbau, KfW) to local governments. The local government programme will be used to finance projects in the areas of water and sewage, waste management and community and social infrastructures. Mr Schröder emphasised that these projects will provide jobs in the ailing construction sector and the trades while directly benefiting small business employees as well as local residents. He vowed that there will be no new borrowing and no tax increases as a result of this stimulus programme. Moreover, the financial room for manoeuvre for local governments is to be expanded as they will, among other changes, not have to finance payments made to welfare recipients as of 1 January 2004.

Reactions

Chancellor Schröder received formal approval from the ruling executive of his Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) - the main party in the coalition government - three days after the speech. He announced that no time would be lost in the full implementation of the reforms, which are supposed to raise around EUR 25.6 billion in the first year of enactment. However, the weight of opposition suggests that some of the more controversial proposals could be watered down.

The response to the Chancellor's 90-minute address was inevitably mixed. Some analysts praised the reforms as a step in the right direction. Others expressed disappointment at a perceived lack of far-reaching changes. Angela Merkel, the leader of the Christian Democratic Union (Christlich Demokratische Union Deutschlands, CDU), the most important opposition party, indicated that the speech was 'surely not a major master plan for the Federal Republic of Germany'. Though she offered cooperation on implementing the plans, she indicated that her party could oppose curbs on unemployment benefits for older people.

Left-wingers in the SPD and trade union leaders, whose once close relationship with Mr Schröder has deteriorated in recent months, attacked the reform proposals aimed at restoring Germany’s growth and at fighting the unemployment problem as 'scandalous'. Michael Sommer, president of the German Federation of Trade Unions (Deutscher Gewerkschaftsbund, DGB) called the planned reductions in benefits 'immoral', whilst Mr Schröder’s proposals demanded little in return from employers, and he noted: 'We will do all to hold them up in the law-making process. We don’t rule out recourse to the law.' Klaus Zwickel, president of the Metalworkers’ Union (IG Metall), called Mr Schröder’s demand for greater flexibility in collective agreements 'completely incomprehensible and superfluous'. Frank Bsirke, the president of the Unified Service Sector Union (Vereinte Dienstleistungsgewerkschaft, ver.di), criticised the planned cuts in health insurance and dismissal protection. He accused the governing coalition of the SPD and Alliance 90/the Greens (Bündnis 90/Die Grünen) of 'shifting wealth from the bottom to the top' and, thereby, following the policies of its centre-right predecessors.

Martin Kannegießer, the president of the metalworking employers’ association (Gesamtmetall), characterised the Chancellor's speech as 'an important step in the right direction, even if no full release of all problems'. He stated that the reform package 'contained several very courageous aspects, such as the cuts in the duration of unemployment benefit and the threat of implementing legal opening clauses in collective agreements'. According to Mr Kannegießer, 'it is now important to implement the announced measures precisely' as they were outlined by Mr Schröder. The proposals were also deemed to be an improvement by Dieter Hundt, the president of the Confederation of German Employers’ Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA); however, in his opinion, they were not far-reaching enough: 'The suggested measures will not suffice to cut unemployment sustainably.'

Similarly, many independent economists, though offering broad support for the supply-side elements of the reform package, such as abolishing the second tier of unemployment benefit and reducing the time period covered by the first, expressed disappointment that the Chancellor had not gone far enough in his reform agenda in order to achieve the results Germany needs in terms of higher growth and lastingly lower unemployment.

Commentary

Forecasts of economic growth are barely above zero, the number of insolvencies is growing, and unemployment is - with 4.7 million people registered jobless in February 2003 - at a five-year high. Such facts demonstrate the dismal state of the German economy. Therefore, economic policy action and social policy reform are definitely needed. Against this background, the package of reform measures announced in Agenda 2010 at least represents a noteworthy effort to loosen Germany’s economic rigidities. Taking into account the backdrop of the Chancellor's trade union-dominated party (DE0303101N) as a strong lobby that will try to defend the status quo, these reform plans can even be described as courageous. Nonetheless, serious problems remain which will hamper efforts to revive in a lasting way the German economy in general, and the labour market in particular. To provide only a few examples:

  • For years, economists have suggested that Germany should make its labour market more flexible by easing the rights of workers faced with dismissal. The new proposals will help modestly to alleviate job cuts for small firms, which are currently time-consuming and costly and, therefore, hamper hiring as firms often prefer to expand operations abroad or use more machinery to automate production instead. Even if the announced changes are a step in the right direction, the threshold from which the dismissal protection law applies should have been lifted from the current five employees to 20, at least, as proposed by the independent Council of Economic Advisors (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, SVR) (DE0302106F), in order to increase the dynamism of the German economy.
  • Instead of only threatening legal reform of the collective bargaining system very imprecisely, the Chancellor could have announced, for example, that he plans to allow collective pay agreements to be altered at the company level if the employer and the majority of staff agree, as proposed by many German economists and the SVR.
  • The unemployment benefit and unemployment assistance cuts are welcome and will help to bring down non-wage payroll costs to some degree. However, the unemployment assistance reductions are probably too modest to provide the necessary boost to employment. According to some economists’ calculations, social welfare payments to those able to work need to be reduced to about two-thirds of their current level to achieve an extensive reduction in unemployment. 'The savings would go to financing generous additional earning options and tax credits for low-wage earners. If properly designed, the reforms would be cheaper for the state than the present social welfare system, and nevertheless the living standard of those who are currently unemployed will increase,' according to the European Economic Advisory Group (EEAG) at CESifo.
  • Providing EUR 15 billion of new subsidised credits to the construction industry increases the danger of exceeding the 3% deficit ceiling set by the EU Stability and Growth Pact, as this measure will increase the deficit of 2.8% projected by Finance Minister Hans Eichel to at least 3.15%.
  • No commitment was made in the speech to not raising taxes and or to reducing the stifling state share in the economy which lowers prospects for economic growth.

(Lothar Funk, Cologne Institute for Business Research, IW)

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