German economic reform

Gerhard Schroder, the German chancellor, struck a landmark deal with the conservative opposition on Monday, paving the way for the most ambitious package of economic reforms since the country's reunification, according to economists. However, Germany will probably not be able to keep the budget deficit under 3 per cent of gross domestic product in 2005, as it pledged to the European Commission.

The reform package includes about 15 bills. They would toughen criteria for receiving social benefits and cut taxes:

  • Chronically unemployed people will be forced to take jobs, even at wages lower than the industry average.

  • New employees in companies with fewer than 10 workers, rather than the five originally envisaged, will no longer be protected against dismissal.

  • Taxes will be cut – however, the original $19.2 billion cut will now be spread over two years.

    "As far as fiscal policy is concerned, things look relatively neutral. The measures are unlikely to raise potential growth," says Jurgen Michels, economist at Citigroup. However, the reform measures "show German politicians are not just capable of talking about reforms, they can also enact them."

    Source: Mark Landler, German Leader and Opponents Compromise on Economic Plan, New York Times, December 16, 2003, and Bertrand Benoit and Hugh Williamson, Schröder and opposition strike landmark reform deal, Financial Times, December 15, 2003.

    For NYT text (requires Times subscription)

    For Financial Times text (requires subscription)

    For more on International (Unemployment and Labour Market Regulation)

    FMF Policy Bulletin/ 6 January 2003
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