To Spur German Economy, Schröder Offers Veer to Right
By ROGER COHEN
BERLIN -- After nine months of confused inertia in economic policy, Chancellor Gerhard Schröder has at last set out where his New Middle in politics lies -- and it is a long way to the right of anything previously embraced by the German leader's Social Democratic Party.
Abandoning the hesitations that have left Europe's economic engine stalled with unemployment above 10 percent, Schröder's government last week set out a radical agenda of American-inspired changes aimed at making Germany more nimble, less regulated, more entrepreneurial and less dependent on the state.
A glossy Economics Ministry report on the sweeping program of cutbacks in state spending and plans for tax changes and deregulation quoted the chairman of the Bertelsmann media company, Dr. Mark Woessner, as saying, "A piece of America -- without losing the social aspect of our market economy -- that is the road to greater German prosperity."
Embracing such a message amounts to a big political gamble by Schröder, whose political style has previously been one of sit-on-the-fence prudence in economic matters and whose party still finds the bedrock of its support among workers, labor unions, teachers and other state employees who have little enthusiasm for the wonders of Wall Street.
"As with Kosovo in military questions, the Social Democrats are now trying to go way beyond what Chancellor Kohl and the Christian Democrats ever dared in economic matters," said Karsen Voigt, a Social Democrat. "But there are considerable dangers, because many feel the party's traditions have been betrayed."
Those dangers include possible defeat in elections in five of the 16 states in the next few months, including a vote in the capital, Berlin. It remains far from clear that the Social Democrats, with no Thatcherite legacy to build on, can follow Tony Blair's Labor Party in veering steeply rightward without heavy cost.
But with Europe's long-term prospects and its new currency, the euro, dependent on Germany's economic performance and high unemployment sapping the country's self-esteem, Schröder evidently felt that further hesitation was unacceptable. Although his reputation was salvaged as the "war chancellor" in the Kosovo conflict, the Social Democratic leader has seen his popularity sag since the fighting ended.
His proposed medicine looks dire -- slashing state spending by $16 billion next year, freezing pensions for two years, ending many subsidies and cutting the state's share of national income, from 48.8 percent today to 40 percent over the next several years.
In addition, Schröder has made clear that he wants to balance the budget, lower taxes and abandon the collective sector-by-sector wage bargaining that has been a feature of the social-market economy in favor of wage negotiations based on productivity gains in individual companies.
The government produced a welter of grim statistics to back the need for change. The share of long-term unemployed, those out of work for more than a year, has risen, from 9.6 percent in 1975 to more than 36 percent today. The state's share of the economy has jumped, from 39 percent in 1970 to almost 49 today.
Although unemployment in the United States was far higher than in Germany in 1983, it now stands at less than half the German level. And the share of wages represented by payments for various social insurance programs has soared, from 26.5 percent in 1970 to 42.3 percent today.
On that basis, Economic Minister Werner Mueller roundly dismissed Germany's hugely successful postwar economic model as one "now stumbling along at the cost of future generations."
Woessner said the chief problem lay in a "leveling of wages" and an "oversupply of Social Security" that had resulted in a lack of "performance-related incentive for those willing to work."
Bertelsmann has acquired Random House over the last year, and other big German companies like banks and automakers have also been investing heavily overseas, partly to offset their dependence on a sluggish German economy, which has the highest labor costs in the world.
It is clear that it is the global outlook of such corporations that Schröder, who was on the board of Volkswagen before he became chancellor last year, is trying to bring to the German economy as a whole. His sympathies have long stood further to the right than much of his party's, but he had previously hesitated to discuss them.
In finally doing so, he risks reinforcing a widespread sense in Germany that tax and other economic policy has tended to favor the wealthy while penalizing workers on the pretext that they have to adjust to the realities of global competition.
"The New Middle is full of slogans like responsibility, self-reliance and new entrepreneurship, but the reality is that most Germans are employees and workers, and once again they are being asked to make sacrifices," said Susanne Stumpenhusen, a Social Democrat who is head of the union of public-sector workers in Berlin.
"For example," Ms. Stumpenhusen said, "we are now told that labor unions must exercise wage restraint, because tax cuts will more than compensate for any salary losses. But we have yet to see any of those tax benefits. Only when the tax money is in our pockets can we discuss this sort of thing."
Like many union members, she expressed sympathy for the alternative proposals put forward by Oskar Lafontaine, who was ousted this year as finance minister. Those centered on raising wages to stimulate demand and jump-start the economy.
"The economic program is one-sided, a pure expression of neo-liberal economics," Michael Knoche of the IG Bau construction union said. "Instead of adopting the view of big companies, Mr. Schröder should have focused on some of Mr. Lafontaine's ideas."
But the fact is that Lafontaine is gone, and Schröder knows that he almost certainly cannot win the elections in 2002 with unemployment at its current level and Europe's biggest economy stalled.
The essence of his political gamble appears to be that short-term setbacks are acceptable if a real reform can be pushed through that would restore Germany's confidence in its ability to find employment for its people.
"Schröder has thrown down a gauntlet, declaring that yesterday's ideology has no place, even if most of his party does not support him," said Lutz Erbring, a political scientist. "In essence, he is gambling that a majority of Germans have the common sense to see that he is right."