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Schröder's bid for German Recovery21 March, 2005
It seems a bit odd to learn that German Chancellor Gerhard Schroeder (Schröder) is only now launching a bold initiative to redress the nation’s lingering unemployment (Guardian; NYT, Deutsche Welle). Germany's economy has performed poorly in recent years, as has much of the EU.
For years debate in the German business press has sounded very similar in spirit to that in the USA: the problem, German managers say, is that labor costs are too high, taxes on business are too high, and the regulatory constraints are too demanding. But for the last 77 months the ruling coalition of Social Democrats and Greens has resisted that diagnosis. Until now: While Mr. Schröder's speech was geared toward Germany's economic problems, it was seen here as an important political gesture, aimed at trying to forge an informal alliance with the main conservative opposition parties in a search for solutions to the country's stubborn economic woes.
[...] Recently released figures show the country's jobless numbers rising above five million for the first time, or 12.6 percent of the work force. In some places, especially in the former East Germany but also in industrial rust belt districts in the former West, the unemployment rate is above 25 percent. At the same time, EU member states face a de facto ban on monetary policy. The mere existence of a European Central Bank (ECB), naturally, means the end of the old prerogative of many European cabinets to manage the interest rate through an embedded central bank manager. I had found the relatively swift and unproclaimed acceptance of these developments surprising at the time, and suspected they would not last for long. And indeed, the governments of Greece, Portugal, France, and Germany have all run afoul of the SGP.
In the opening months of the year, it became clear that, while the EU Commission could be a veritable tiger when confronting the little states of Portugal, it was far more circumspect in reproaching the likes of Germany or France. Clearly large, rich countries have privileges; and while it no doubt must rankle for former Portuguese PM António Guterres, this rule applies everywhere. (Double standards are not regarded as a vice in the private sector). And at long last, the SGP is being revised out of existance: In recent years, Schroeder complained that the old euro rules made it impossible to ignite growth because they were too strictly enforced by the European Commission.
He was all smiles at the summit, at one point lauding Juncker, who oversaw the euro reform bid, for having "done a top-notch job." This is related, quite naturally, to Mr. Schröder's supply-side proposals (dictated, in my opinion, by political realities); while Germany has already been running a deficit >3% GDP for four consecutive years (counting 2005), it still has a dearth of jobs. Slashing taxes and biting off a major infrastructure campaign is hardly going to improve that picture: Fearing continued voter backlash in key state elections, the German government last week held a "jobs summit" with opposition leaders. It emerged with a plan to slash the corporate tax rate to 19 percent, from 25 percent. And it pledged relief for mid-sized companies and increased public investment in infrastructure and education. The CSM, in a classic passing of the buck for editorial laziness, rubberstamps the business managers' diagnosis of Germany's problem as "anaysts say" UPDATE: Bloomberg mentions that Schröder's Social Democrats face a tough land election in North Rhine-Westphalia, Germany's most populous state (22 May). Austria is cutting its corporate tax rate ahead of Germany's, but both will remain higher than rock-bottom rates in Romania and other Central European countries. In the slashing, the USA has been left with comparatively high rates, if one includes all layers of government.
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