Tackling the Reform Problems of Germany

The word has become as commonplace as the snow on many rooftops this winter in Germany: "reform." The job market, the health system, the pension system -- all are in need of reform.

Germany's transportation minister was among the latest of the country's political leaders to admit as much this week, while the stinging defeats that his Social Democratic Party suffered in two state elections on Sunday continued to smart. And he knows his boss, Chancellor Gerhard Schröder, is well aware of this, too.

"It is perfectly clear to the chancellor that he must introduce massive reforms," Manfred Stolpe told the newspaper Die Welt in an interview published Tuesday. But it is also perfectly clear to the chancellor -- and his political opponents -- that he needs their help even more since voters pushed the Social Democrats out of power in his home state of Lower Saxony and gave the opposition Christian Democrats an absolute majority in the state of Hesse.

He must turn to these opponents because of Germany's system of legislative power-sharing. Under that system, Schröder's coalition of Social Democrats and Greens controls the parliament. But his political foes control the country's second legislative body, the Bundesrat. This assembly is composed of representatives of the 16 German states and considers about half of the issues that go through the parliament.

As a result of Sunday's vote, the Christian Democratic Union, the Christian Social Union and the small Free Democratic Party strengthened their hold on the Bundesrat, and have begun maneuvering for position in the debates over the country's much-discussed reforms. Because of these changes, the country's politicians will have to test their skills in creating compromises as they try to reform a system that is being dragged down by sinking tax revenues and rising unemployment.

Continuing unemployment

One of the most contentious problems is Germany's rising unemployment. Joblessness is a root problem of Germany's economy, robbing the country's of tax revenues and driving up social costs. The ailing labor market deteriorated further in December, with the monthly unemployment rate rising from 9.7 percent to 10.1 percent. The country now counts 4.22 million citizens among the jobless, a figure well above the 3.5 million level that Chancellor Gerhard Schröder once promised to reach and a total that exceeds the population of the western state of Rhineland-Palatinate.

In order to find a solution, the German chancellor has called on an old acquaintance, VW personnel chief Peter Hartz (photo), to head up a commission to finds ways of reforming German’s highly regulated labor market. In August, Hartz announced his suggestions, which included the conversion of Germany’s 181 labor offices into "Job Centers" that serve as one-stop-shops for the jobless, new pressure on the unemployed who refuse to take jobs offered and the expansion of the temporary work sector.

However, the legislative debate on the introduction of some of the Hartz proposals did not go smoothly at the end of last year, and a conference committee of lawmakers had to seek a common ground after the opposition raised objections to the plan covering temporary workers.

Since then, though, some Christian Democrats have been endorsing the Hartz approach. At the end of January, the Christian Democratic premier of Saarland, Peter Müller, pledged to work for the quick passage of the plans. But others continue to express doubts about Schröder's approach to the problem. After Sunday's election results were announced, one of the opposition's leaders spoke out. "We need a different course. Otherwise, we are going to have 5 million jobless," said Edmund Stoiber, who heads the Bavarian-based Christian Social Union.

Falling tax revenues

Another main burden to Germany's economy is the large drop in tax revenues. German Finance Minister Hans Eichel has to wrestle for months now with the financially draining effects of joblessness.

Due partially to unemployment, the government's tax revenues have fallen, and the country's budget deficit climbed to €34.6 billion ($37.6 billion) last year. By doing so, it breached a barrier established to protect the stability of the euro, the currency shared by 12 countries in the European Union.

In order to boost revenues, Eichel has created a 48-point tax plan which among other things, would impose a new tax of 15 percent tax on capital gains made on the sale of stocks and real estate, reduce a subsidy the government pays to people who buy homes and impose the full value-added tax on a list of products that enjoye a lower rate. With these measures, Eichel's aims to generate €3.6 billion in revenues this year and up to €16.7 billion by 2006.

The Christian Democrats, however, are united in their opposition to Eichel's plans. "We will not be raising any taxes during this economic crisis," said Roland Koch, the premier in the state of Hesse who was re-elected on Sunday.

Instead, the Christian Democrats have suggested that the government take a different approach that can form the basis for negotiations. "Every day, that the government sticks to this (proposal) is a day that costs jobs," Koch said.

Germany's ailing social system

A further main area which is in desperate need of reform is the health system. Employees and employers are watching as rising payments for health insurance, the national pension plan and old-age care eat away at paychecks and smother job-creating possibilities. The deficit run up by the country's public health insurance companies is thought to have hit $2.5 billion last year. In response, about one-third of the country's public health funds increased their premiums this year, according to the newspaper Bild am Sonntag.

Schröder has taken a two-pronged approach on healing the social system's ongoing ailment. First, Health Minister Ulla Schmidt has been charged with creating a reform that will increase the efficiency and quality of health care in Germany. But she has delayed releasing her ideas, saying she wanted to wait until after Sunday's elections.

That timetable changed on Tuesday, when the general secretary of the Social Democrats, Olaf Scholz, said the plan would be announced in conjunction with the second part of Schröder's plan, the Rürup Commission, which could be sometime this spring, Scholz said.

The commission was created in November and is headed by the economist Bert Rürup. The panel's goal is to find long-term ways of solidifying the financing of the social system. "If we can't cut the non-labor-related costs, we will be unable to solve our job-creation problem," Rürup said after being selected.

Since November, the commission has not presented any concrete solutions, but various members have made public suggestions that have given the country's citizens an idea about the 26-member group's thinking. Rürup suggested, for instance, that the retirement age could be raised from 65 to 67, and commission member Bernd Raffelhüschen suggested that each insured person could pay up to €900 out of his or her own pocket for health care.

The Christian Democrats, however, have serious doubts about the work of the Rürup Commission, announcing a panel of their own on Tuesday that will compete with the chancellor's group of experts. The panel's goal will be to create a "fundamental change of direction" in the social system, the party announced. The panel is led by former German President Roman Herzog, who once said a "jolt" was needed to sweep across Germany. Herzog's commission will report its proposals in the fall. But Merkel assured Schröder's government that the opposition still remained open to talks on the issue.