Germany's Window Of Opportunity
At long last, Germany's economy is picking up. What is the response to this good news? Organized labor, the central bank, and the government all appear to be racing to see who can ruin the recovery the fastest. IG Metall, the heavyweight union, has renewed its clamor for a shorter workweek to goose up employment. Central bank President Hans Tietmeyer, concerned over rising import prices, is dropping hints of a rise in interest rates. And Finance Minister Theo Waigel is undermining voters' already shaky confidence in the government by suggesting that his cabinet is about to be turned topsy-turvy.
In fact, Germany's long-awaited recovery hands Chancellor Helmut Kohl a life preserver. The administration should seize this golden opportunity to reassert its leadership. Kohl's latest flop--and one that infuriated the business community--was his failure to push through much-needed corporate tax cuts. To be sure, the opposition Social Democrats scuttled the reforms, claiming the tax cuts weren't fair. But one reason Kohl's government has been reluctant to tackle taxes is that Germany needs the revenues to keep its budget deficit around 3% of gross domestic product, as required for European monetary union. Now that faster growth promises to boost tax receipts, however, the government should make another stab at tax reform. That would do much more to create jobs than caving in to the demands for a shorter workweek.
In neighboring France, politicians seem to be getting the idea. Like IG Metall, the powerful Confederation Generale du Travail trade union is agitating for shorter hours. Yet the Socialist government of Lionel Jospin is backing off from a campaign promise to shrink the workweek from 39 hours to 35 with no reduction in pay. In France as in Germany, with unemployment at record highs, workers are frustrated that improved growth and corporate profits are not translating into more jobs. But shorter working hours are simply a Band-Aid, while tax and other structural reforms would spur growth and employment in the long term.
Tietmeyer, meanwhile, must walk a tightrope. Raising rates too soon would choke off a recovery that Germany has been awaiting for nearly six years. But letting investors know he's still the inflation hawk they love and trust is useful. His hints have already teased up the mark. That could nip import price inflation in the bud.
As for Kohl, he should quiet his squabbling coalition and take advantage of the economy's health to push through regulatory, tax, and other reforms. It's the only chance he has to face next year's elections with a bang rather than a whimper.