Will Kohl Really Seize The Day?

The time may be right to slash Germany's welfare state

Every Easter, German Chancellor Helmut Kohl vacations for a couple of weeks in the Austrian Alps. Usually his main aim there 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 unions and businesses, Kohl insisted on $33 billion in public spending cuts in exchange for government support of a jobcreation 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 pay for reunification, he pushed through huge tax surcharges. Those levies--on top of already sky-high taxes--weighed down German businesses, spurring them to expand abroad while laying off thousands at home.

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).

POLITICAL ACES. But the drama of the bold announcements, says Schulte, is "pure Kohl." The Chancellor is moving fast because he holds some 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 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. And Kohl could still antagonize lobbies--from farming and steel to coal and real estate--that cherish their subsidies and tax breaks.

To strengthen his hand, Kohl is using German's economic weakness to explain his actions to ordinary Germans. Unemployment is 10.8% of the workforce, and Kohl forecasts that growth this year will be little more than 0.75%. 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." Kohl's point man in the austerity drive is Interior Minister Manfred Kanther. On Apr. 25, Kanther told civil service and public-sector unions to forget about any raises for the next year or two. His explanation: "The till is empty."

Kohl's program to ax budget deficits is just the beginning. Kohl has also set up two government commissions: one to trim the welfare state further, the other to ready a tax overhaul by 1998. One radical tax-reduction plan prepared by Gunnar Uldall, economic spokesman for Kohl's Christian Democratic Union (CDU), foresees slashing Germany's top income and corporate tax rate from 53% to just 28%. An admirer 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. The unions are 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 brief work stoppage to oppose any public-sector pay freeze.

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 is underscoring Kohl's grim message about Germany's 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 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.

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