Kohl The Knife

He's moving to slash the welfare state

Every Easter, German Chancellor Helmut Kohl vacations for a couple of weeks in the Austrian Alps. He sees a few political friends and does an interview or two, but the main aim is to relax and lose a few kilos at the spa town of Bad Hofgastein. This year, however, he hatched a radical dieting plan for all of Germany. If Kohl sticks to the regime, the outcome could be revolutionary economic change, ending the country's traditional social harmony among labor, management, and government.

Kohl finally seems to be waking up to the need for tough action if Germany is to keep its economic might. At an Apr. 23 meeting with top brass from German unions and businesses, Kohl insisted on $33 billion in public spending cuts in exchange for government support of a job-creation program promoted by labor. Union leaders cried foul and stomped out of Kohl's office. "Kohl has abandoned consensus politics," says Bonn-based political consultant Heinz Schulte, "but he is not into [former British Prime Minister Margaret] Thatcher-style confrontational politics yet."

That day may not be far off. For years, the Chancellor took German industrial strength as a given while he practiced high statecraft. To finance his vision of German reunification, he pushed through big tax surcharges. But those levies--on top of already sky-high taxes--are weighing down German businesses, spurring them to expand abroad while laying off thousands at home.

POLITICAL ACES. Business leaders from German Industry Federation President Hans-Olaf Henkel to Deutsche Bank CEO Hilmar Kopper clearly have been stepping up the pressure. Their message: Kohl must act--to simplify and slash taxes, cut welfare excesses, and hack away burdensome regulation. He's hearing the same thing from a new brain trust of powerful politicians, Johannes Ludewig, State Secretary at the Economics Ministry, and Wolfgang Schauble, Bundestag floor leader of Kohl's Christian Democratic Union Party (CDU).

But the drama of the bold announcements, says Schulte, is "pure Kohl." The Chancellor is moving fast because he holds a fistful of political aces that enhance his chances of success in what is clearly a risky venture. His coalition emerged stronger from key elections in three German states on Mar. 24. Leadership of the main opposition Social Democratic Party (SPD) is deeply divided. And the next general election is not due until October, 1998. "It is a once-in-a-lifetime opportunity," says Deutsche Bank board member Rolf E. Breuer.

Kohl is also aware of the risk of a backlash. His government has a slim 10-vote majority in the Bundestag. In the upper house--the Bundesrat--the SPD opposition still controls 35 of the 69 votes. The CDU's left wing is committed to preserving the welfare state intact. And Kohl could still antagonize powerful lobbies--from farming and steel to coal and real estate--that cherish their subsidies and tax breaks.

To strengthen his hand against real and potential enemies, Kohl is using German's economic weakness to explain his actions to ordinary Germans. Unemployment is at 10.8%, and Kohl forecasts that growth this year will be little more than 0.75%, after 1.9% in 1995. Opinion polls put job anxiety as the main concern in Germany. Kohl told the Bundestag on Apr. 26: "People have finally grasped that we need real changes to stimulate more dynamic growth and overcome obstacles to job creation."

To revive the economy, Kohl told the Bundestag he needs a $33 billion cut in government outlays next year, with an initial $13 billion to be lopped off health and welfare spending. The day before, his point man in the austerity drive, Interior Minister Manfred Kanther told civil service and public-sector unions to forget about raises for the next year or two. Kanther said: "The till is empty."

Business is rooting for Kohl. But it wants him to go faster still. On its agenda are substantial cuts in corporate taxes and nonwage costs such as social security and health-care levies. Kohl's package "is about as much as one could expect as a first step," says Thomas Mayer, senior economist at Goldman, Sachs & Co. in Frankfurt, "but it will not be sufficient to make the German economy fit for global competition."

In reality, Kohl's program to ax budget deficits is just the start. Its tactical aim: to enable Germany to meet Maastricht Treaty goals of government budget deficits that are no more than 3% of gross domestic product for the European Union's planned common currency in 1999. But Kohl has also set up two government commissions: one to trim the welfare state further, the other to ready a tax overhaul by 1998.

They should produce real fireworks. One radical tax-reduction plan prepared by Gunnar Uldall, economic spokesman of Kohl's Christian Democratic Union (CDU), foresees slashing Germany's top income and corporate income tax rate from 53% to just 28%. A fan of U.S. supply-side economists, Uldall says $77 billion in lower revenues can be recouped by higher growth and closing tax loopholes.

GRIM MESSAGE. Such revolutionary ideas are gathering momentum, but Kohl needs to rally more support through public debate before he can abandon such sacred cows as Germany's steeply progressive tax system.

The unions are already threatening a ferocious fight. Klaus Zwickel, head of IG Metall, Germany's largest labor union, has slammed Kohl's plans as "a plot against labor and social justice." He is calling for strikes to oppose proposed cuts in employer-paid sick pay to 80% of basic wages from 100% of average pay now. Trash collectors in Dusseldorf staged a quick work stoppage to oppose the planned public-sector pay freeze. Unions will certainly widen the strikes nationally during the summer if the government sticks to its guns and insists on the freeze to save more than $15 billion on federal and state wage bills.

Despite its angry rhetoric, the opposition has little new to offer as an alternative. The SPD is calling, for example, for higher taxes on the rich. Meanwhile, the latest business news underscores Kohl's grim message about the economic future, absent reforms. On Apr. 29, for example, Audi, Volkswagen's luxury-car unit, said it plans big savings by transferring more engine manufacturing to a plant in Gyoer, Hungary.

If Kohl keeps his nerve and delivers, he could lay the groundwork for future growth and step up the pressure on neighbors such as France. But a fumble will enfeeble Germany for the next decade. It is a defining moment--for Germany and its Chancellor.

Before it's here, it's on the Bloomberg Terminal.