Chancellor Helmut Kohl has finally gotten behind tax and welfare reform in Germany. This promises to be the start of a revolution in the social pact between government, business, and labor. The system was the basis of Germany's postwar economic success. But along with overregulation, it now cages business, crimps growth, and kills jobs. With 4 million unemployed, Germany's jobless rate tops 11%.
The shrewd Kohl senses a major shift in the public's mood. A mass demonstration against his plans, organized by labor unions this summer, had little impact on public opinion. Increasingly, workers are cutting deals in individual plants and companies to take pay cuts and work more flexible hours.
But Kohl risks everything by delaying tax reform until 1999. The political opposition is already diluting proposed measures. The opposition's control of the Bundesrat, or upper house, which has to approve finance bills, gives it a cudgel to bloody reform. And public support for tax reform could wither away over time as voters learn just how hard they are going to be hit when it comes to pruning pensions and health and welfare benefits. The most radical tax plan has already been killed--to sweep away all tax breaks and subsidies for a simple three-band system with a top rate of 25% instead of 57%. Now, a top rate of 40% with fewer breaks looks likely.
Time is running out for Germany. Since 1989, the country has lost 20% of its competitiveness measured in unit wage costs against its main rivals. While big German companies such as Mercedes-Benz and Siemens have successfully remade themselves, many others haven't. Enterprises that don't face global competition, from services to the railroads, remain woefully uncompetitive by international standards.
If Kohl should fail in this latest round of reform, it would prove fatal to his ambition to shape Germany's reunification, as well as Europe's integration. To achieve these goals, he needs to show strong leadership. The Chancellor will never again get as good a chance.