Germany's Reforms Are Barely A Start

German Chancellor Gerhard Schroder says his tax plan presented on June 23 is the biggest reform project postwar Germany has ever seen. Maybe so, but that's not saying much. Reforms to date have confirmed foreign stereotypes of Germany as a land of pensioners clinging to their social-welfare perks, fearful of change. In fact, German companies are far more dynamic than outsiders often recognize--witness DaimlerBenz's audacious merger with Chrysler Corp.

But the government has so far clung to old-fashioned policies that have prevented Germany Inc. from living up to its potential. The latest reform package is no improvement. Schroder plans to ease the tax burden on business by $4.2 billion starting in 2001. The sum is paltry and barely makes up for the recent closing of tax loopholes for many industries. The move will have only a temporary effect on growth, according to a study by the RWI economic think tank in Essen.

In any event, taxes are only part of the problem. Labor rules need to be relaxed so that struggling startups can hire and fire workers in line with business conditions. Businesses should be able to get rid of poor-performing workers without prohibitive due process. Unemployment benefits shouldn't be so generous that they're a disincentive to work.

Then there is the matter of pension reform. Labor Minister Walter Riester is proposing that workers begin to contribute to private pension savings plans as a means of reforming Germany's troubled pension system and helping the budget. Schroder has yet to publicly support the plan. The truth is that serious labor reform isn't even on the table. So far, Schroder has lacked the political will to force changes that would mean temporary pain but long-term benefit. Until he does, Germany will continue to underachieve.

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