Thu, Aug 25, 2005 page9

• German election will be dominated by economic concerns

  • DPA
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  As Germany builds up to its mid-September election, many hope the landmark vote will lead to a major makeover of Europe's biggest economy.

  Optimism that the early election might help to break the deadlock over reform has already helped to power the Frankfurt stock market to highs not seen since the New Economy boom about five years ago.

  With the opposition Christian Democrat-Christian Social Union (CDU-CSU) in control of both houses of parliament and opinion polls pointing to opposition chancellor candidate Angela Merkel as favorite to win, expectations have been growing that a Merkel victory could trigger a quick round of reforms.

  But while Chancellor Gerhard Schroeder has vowed to press on with his Agenda 2010 welfare and labor market reforms, many economists doubt a Merkel-led government would introduce large-scale changes.

  "Even if there is a change in government, it is unlikely to result in a big reform push," Morgan Stanley economist Elga Bartsch wrote in a note to clients.

  "The CDU-CSU election platform essentially proposes to continue with the gradual reforms pursued thus far by Chancellor Schroeder with the Agenda 2010," she wrote.

  Equally troubling for those betting on reforms is that the election rhetoric seems to have largely skirted around the critical issue facing Germany -- how to revamp the country's fragile and inflexible labor market to spur job growth.

  This is even more surprising with unemployment standing near a post-World War II high of 11.5 percent and the steady erosion of support for Schroeder's Social Democrat-led government over its perceived failure to address high unemployment. This is believed to be the key reason behind the push to hold a snap election.

  Instead, when it comes to reform, a lot of the election talk has been about tax -- whether to increase VAT, whether high income earners should be hit with a special surcharge and what rate of corporate tax should be charged.

  Even the centerpiece of Merkel's campaign platform, to cut Germany's high non-wage costs, is to be funded by a highly controversial plan to hike the nation's VAT rate by two percentage points. The member of Merkel's shadow cabinet drawing most media attention is Paul Kirchhof, a tax expert.

  But could it be that the magnitude of the changes needed to boost hiring in the country are so enormous that the political leadership prefers to focus on tax rather than delving too deeply into the specifics of labor market reform for fear of alarming voters.

  Many economists believe that the country's still very restrictive hire-and-fire labor laws (the so-called Kuendigungsschutzgesetz) must be rolled back if more flexibility is to be injected into the labor market.

  A recent report by the Paris-based Organization for Economic Cooperation and Development on unemployment concluded that tough employment laws discouraged firms from hiring, while fewer people lost their jobs.

  It also acknowledged that reforming the labor market was not an easy task.

  "The feasibility of labor market reforms can be hindered by the fact that they often entail short-run costs, while their benefits typically take more time to materialize," the report said.

  results clear

  However, the results of a more flexible labor market are clear enough. The OECD estimated that the US's more flexible labor rules mean that the growth rate in the world's biggest economy is 3.25 percent compared to 1.7 percent in Germany and its 11 eurozone partners.

  But many employers, especially small-to-medium-sized companies, say that they are very reluctant to take on new workers because Germany's redundancy laws make it very difficult and costly to downsize if their business hits a soft patch.

  Viewed from outside Germany, companies seeking to invest or to expand their business operations in the nation see the Kuendigungsschutz as a major obstacle to hiring.

  "We don't like employing more people [in Germany] because we are not sure if we can fire them after the end of particular projects," said Petr Manas, business development director of a Czech IT firm, LCS International.

  Schroeder has already removed the Kuendigungsschutz for companies employing up to 10 workers. Merkel's conservative Christian Democrats are now proposing to extend the exemption to include firms employing up to 20 people.

  But how this might be achieved or how the German labor market might be further liberalized have so far rarely featured in the election debate.

  Apart from risking a backlash from voters no-one seems to really know what would happen if the rigid job protection laws, which cover about 60 percent of the workforce, were suddenly lifted or scaled back.

  It is a question that economists in Germany have been grappling with for some time. In the meantime, however, Germany's employers and to an extent workers fighting to save their jobs appear to have taken matters into their own hands.

  Spearheaded by companies in Germany's hard-pressed former communist east, businesses across the country have been simply abandoning the nation's long-established industry wage bargaining system and opting to negotiate pay deals on a more flexible company basis.
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