Germany: Why Schröder's Reforms May Fall Short

The German stock market was indifferent on Mar. 14 after Chancellor Gerhard Schröder laid out the most far-reaching reforms Germany has seen since he took office in 1998.

That's partly because the market is obsessed with Iraq, but it also reflects Schröder's credibility. He has promised so much and delivered so little that business is skeptical that the reforms will become law.

Schröder's proposals are promising, but they fall short of the complete remake the German economy needs (table). And some ideas seem poorly thought out. For example, a program to offer low-cost loans to financially strapped cities won't help the worst-off cities -- they are already indebted to the legal max. Hans-Werner Sinn, president of the Munich-based IFO Institute, the major economic think tank, says Schröder failed to offer any incentives to coax the unemployed into the job markets. Sinn advocates a rule change that would allow the jobless to work part-time or for low wages without losing all their benefits.

If history is any guide, the final result will be more modest. Schröder's Social Democratic Party is already complaining that the reforms fall too heavily on workers. And Schröder doesn't seem to be that enthusiastic himself. The only time his voice showed any passion during the parliamentary address was when he blamed German corporate mismanagement for many of the country's economic problems.

Much will depend on the opposition Christian Democratic Union and its Bavarian sister party, the Christian Social Union. CDU Chairman Angela Merkel has signaled a willingness to cooperate, but there are already signs of a power struggle between her and Edmund Stoiber, Bavaria's Prime Minister, who came within a hair of unseating Schröder in the September elections. Given the political posturing, change will come only at the margins, German unemployment will remain in the double digits, and economic growth will remain below 2%, even in good years.

By Jack Ewing in Frankfurt

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