Government seeks an Alliance for Revival

In January 2003, the German government announced - in its annual economic report, entitled 'Alliance for revival - starting the reforms together'- the introduction of a wide range of economic reforms aimed at promoting growth and employment, which, in turn, should increase consumer and investor confidence. The report is a statutory response to the annual report by the independent German Council of Economic Advisors that is presented to the government by November each year. Like this group of 'wise men', international institutions that monitor the German economy have raised doubts that the reforms that have so far been enacted as well as those planned for the near future will solve the country's current employment and growth problems.

On 29 January 2003, the economics and labour minister, Wolfgang Clement, adopted the government's Annual Economic Report (Jahreswirtschaftsbericht) for 2003. The document is entitled 'Alliance for revival - starting the reforms together' (Allianz für Erneuerung - Reformen gemeinsam voranbringen). According to the report, which focuses closely on labour market reform, the federal government - a coalition of the Social Democratic Party (Sozialdemokratische Partei Deutschlands, SPD) and Alliance 90/The Greens (Bündnis 90/Die Grünen) - plans to promote employment and growth by overhauling, among other areas, the entire labour market system in order to tackle the unemployment problem and 'kick start' the German economy. The government is setting itself the task 'to reduce unemployment substantially and bring about a return to full employment during this decade.'

Reform agenda ahead

In his analysis of Germany’s high unemployment and sluggish growth, the minister blames the after-effects of German unification and the ailing world economy. However, he also emphasises that inflexibility in some markets, particularly the labour market, have played an important role. In his forecast for 2003, Mr Clement warns that worse is still to come on the employment front, as the number of jobless people could reach, according to a government estimate, an average of 4.2 million for the year. This is despite the fact that the federal government will, according to the minister, trigger a decisive impetus for greater momentum in the labour market by implementing the August 2002 proposals of the Commission on Modern Service Delivery on the Labour Market (Kommission für moderne Dienstleistungen am Arbeitsmarkt) - the so-called Hartz Commission (DE0209205F). It is hoped that the proposals implemented will create a new balance between necessary flexibility and indispensable solidarity.

To improve the progress of reforms, the federal government has called on all social groups and major economic players to join forces in an 'Alliance for revival' (Allianz für Erneuerung). According to the minister, the rapid modernisation of the economy and society can be achieved if all the participants work together. To support this process, the government will, he announced, develop new structures for the tripartite national Alliance for Jobs, Vocational Training and Competitiveness (Bündnis für Arbeit, Ausbildung und Wettbewerbsfähigkeit) (DE0212205F). Mr Clement also notes that 'renewal will not be painless' and that 'everyone will have to be much more self-reliant' in the future.

Some of the measures announced by the minister that aim to continue the reforms that have already been initiated, and to improve the conditions for sustainable economic growth, are as follows:

• pressing ahead with labour market reforms that have already been introduced;

• reforming the social security system;

• continuing the fiscal policy which aims at easing the pressure on the economy and at consolidation, and

• pressing ahead with reducing 'red tape' especially, with respect to small and medium-sized businesses.

Statutory duty

Publication of the Annual Economic Report is a regular statutory duty of the government. Every year since the 1960s, the independent Council of Economic Advisors (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) - five senior economics professors often called the 'wise men' in the public debate - has had to draw up an annual report and present it to the government by 15 November. The Council’s report is promptly submitted by the government to both the lower and upper houses of parliament (Bundestag and Bundesrat respectively), and is simultaneously published by the Council. The government has to respond, within eight weeks, to the council’s annual report (which has always caught the public’s attention) when it presents its own Annual Economic Report to the two houses of parliament. In its response, the government must also state what economic policy consequences it has drawn from the Council’s annual report.

In its latest report, entitled '20 proposals for employment and growth' (Zwanzig Punkte für Beschäftigung und Wachstum), issued on 13 November 2002, the Council notes that Germany has the weakest economic performance of all 'euro-zone' economies. According to the document, the country’s low growth momentum is chiefly attributable not to temporary, cyclical factors, but rather to institutional and structural disincentives within the German economy: 'This is due to over-regulation of the factor and goods markets, a lack of efficiency in the social security system and wrong political decisions in charting the country’s future path following German reunification.'

Hence, the focal point of the Council’s proposed programme for employment and growth is a reform of the labour market which tackles the problems at their roots. This includes, for example, making current rules protecting employees against dismissal (Kündigungsschutz) less stringent so as to improve the employment prospects of jobless people: 'The social selection criteria for redundancy [Sozialauswahl] should be defined more clearly. Legal provisions should be enacted which enable newly recruited persons voluntarily to waive dismissal protection rules in return for an agreed redundancy compensation package in the event that they are subsequently made redundant. The relaxation of dismissal protection rights should be extended from firms employing up to five employees to firms with up to 20 employees.'

The Council states that much more needs to be done than merely enacting the proposals put forward by the Hartz Commission. According to the 'wise men', political decision-makers must improve overall labour market flexibility, decrease non-wage labour costs and expand the low-wage sector whilst, at the same time, radically restructuring the current system of unemployment benefits and social assistance. Such measures, which go far beyond the proposals currently being discussed by the ruling politicians, would, the Council contends, enhance the attractiveness of employment for employees and employers alike.

Reform deficits

There is also broad consensus among international institutions - such as the Organisation for Economic Development and Cooperation (OECD), the International Monetary Fund (IMF) and the European Commission (CEC), all of which monitor German economic reforms - that the impact of the reforms so far enacted will be limited. This is partly because even the rather modest proposals suggested by the Hartz Commission were subsequently 'watered down' under trade union pressure.

On 14 January 2003, the European Commission stated in its report on the implementation of the 2002 Broad Economic Policy Guidelines that 'Germany is among the Member States that, in overall terms, are considered to have given the least effective follow-up to the country-specific parts' of the Guidelines. In particular, 'progress to date [in implementing the Guidelines' labour market recommendations] is considered to be clearly insufficient. No new measures were taken to promote wage developments that allow for differentiation according to productivity developments and skills differentials. Monitoring and evaluation of the effectiveness of active labour market policies needs to be urgently improved.'

The OECD's December 2002 report on Germany notes that, even if German growth deficiencies are partly attributable to the effects of reunification, those effects could be overcome with 'sustained austerity of state spending'. Though the OECD praises recent German efforts to reform the country’s labour markets, it states that more needs to be done: 'Boosting potential growth and employment requires deeper structural reform, especially on the labour market.' More specifically, the OECD makes some proposals: 'This requires, inter alia, reducing the tax wedge, promoting a higher degree of wage responsiveness to market conditions, and reviewing the complex employment protection procedures.' Regarding employees' dismissal protection, the OECD proposes 'to offer an option to open work contracts to specify severance pay in case of redundancy in return for a less stringent dismissal protection.'

A few weeks before the publication of the OECD report, the IMF's annual report on the German economy stated that 'the Hartz Commission proposals did not address incentives to work or problems with the flexibility of hiring and firing regulations.'

Reactions

According to economists and industry representatives - two groups that tend to favour a sweeping overhaul of Germany’s labour market, generally in line with the recommendations made by the independent Council of Economic Advisers and international institutions - Minister Clement’s report fails to offer concrete reform proposals. For Dieter Hundt, the president of the Confederation of German Employers’ Associations (Bundesvereinigung der deutschen Arbeitgeberverbände, BDA), the current increase in unemployment is the payback for misguided labour market and tax policies as well as for the present government’s perceived neglect of structural reforms in the welfare state. After the publication of the Council of Economic Advisors' annual report in November 2002, he called on the government to implement many of its proposals.

In response to the minister’s message that the entire system needs to be revised if Germany is to tackle its unemployment problem, the trade unions immediately announced massive opposition. Michael Sommer, president of the German Federation of Trade Unions (Deutscher Gewerschaftsbund, DGB), fears that the planned reforms will happen 'on the back of employees and the weakest in society'. Klaus Zwickel, president of the Metalworkers’ Union (IG Metall),rejected further welfare state deregulation based on 'neo-liberal' ideas. Heinz Putzhammer, a member of the DGB board, said that the OECD proposals to decrease the power of trade unions to shape collective bargaining, and to reform the German labour market by easing job protection laws, have become a 'regular obsession' of this international institution, which, he argued, only 'strives for short-term effects'.

However, an informal meeting has been announced between the main participants in the Alliance for Jobs in early March to discuss a relaxation of labour law which, even according to some leading trade union representatives, is not entirely up to date anymore. Frank Bsirske, the president of the Unified Service Sector Union (Vereinte Dienstleistungsgewerkschaft, ver.di), for example, declared his willingness to discuss changes of current restrictions on dismissals at the planned meeting of union leaders with leading representatives of employers' and business associations and Chancellor Gerhard Schröder on 3 March. 'We want to influence the current debate in the interest of employees,' he said. Michael Sommer of DGB seems to be prepared 'to discuss all rules of labour law without prejudice'. Simultaneously, however, he has rejected any more flexibility in the current system of dismissal protection. However, according to Martin Kannegießer, the president of the metalworking employers’ association (Gesamtmetall), present regulations are 'a barrier to creating new jobs'.

Only two weeks earlier, the Alliance for Jobs, Vocational Training and Competitiveness appeared to have disintegrated. Representatives of employers had wanted to discuss easing Germany’s strict job protection laws, wage moderation in the medium term, and effective 'opening clauses' in collective bargaining. However, during preparations for the tripartite Alliance for Jobs forum, union representatives had rejected proposals to weaken job security provisions for workers in order to reduce overall costs of labour and encourage more recruitment (DE0302104N).

Commentary

It is true that part of Germany’s low growth and high unemployment problem lies beyond the control of the government. When an economy faces slumps and shocks like reunification, employment suffers in the short term. However, the persistence of both low growth and low employment that go hand-in-hand with higher and higher unemployment has little to do with either the ups and downs of a country’s economy or external shocks. Instead, this set of problems is mainly caused by Germany’s highly regulated job market. In this kind of situation, relatively minor changes, such as those currently implemented and planned by the government in labour market policy, are unlikely to have a significant impact either on the job market or on the prospects for economic growth. The only way out of the current situation is a reorganisation of labour market legislation and the social security system, in which nothing is sacrosanct.

Minister Clement has, at least partly, recognised the need for such institutional reforms, and has suggested, among other changes, relaxing job protection law to make it easier to dismiss and hire workers. However, he encountered immediate opposition from many of Germany’s trade unions, which are strongly represented within his Social Democratic Party. He will have to overcome such resistance if he is to solve Germany’s labour market and economic growth problems. The good news is that, as the government builds its case for job market reform, signs have begun to emerge that the union movement may accept at least a partial easing of tough regulations protecting workers from being fired. In the past, the unions considered such deregulation a taboo subject. (Lothar Funk, Cologne Institute for Business Research, IW)