Commentary: Schröder's Reforms: Less Than Meets the Eye

Germany's Chancellor may push through the package, but it's not strong enough to turn around the economy

By Jack Ewing

Fiscal failure: It's hardly the sort of thing a finance minister wants to own up to. But Germany's Hans Eichel has admitted that Germany's budget deficit in 2003 will again exceed the limit of 3% of gross domestic product that euro zone countries agreed to when they established the common currency. Worse, Eichel told Der Spiegel news magazine there is no way he'll meet his goal of balancing the national budget by 2006. Eichel's admission comes right on the heels of a string of bad news: declining industrial production, lower investor confidence, slumping consumption. In Germany these days, all the arrows point south.

But there's something else going on here. The government is milking the bad news, genuine as it is, for all it's worth. Hence Eichel's confession to all of Germany that he can't balance a budget. Ordinarily, such a statement would hammer a government's reputation. But Chancellor Gerhard Schröder is using Eichel as press agent for one of the biggest political acts of his life, a special congress of the Social Democrats in Berlin on June 1, when the party will consider Schröder's reform package, dubbed Agenda 2010. Among the key provisions: limits on unemployment benefits and rollbacks of some regulations that make it difficult to fire workers. Now, despite opposition from labor unions, analysts expect Schröder to prevail. "Eichel has made the seriousness of the situation clear," says Siegmar Mosdorf, Schröder's former deputy economics minister. The trouble is, Germany is way beyond the point where the Chancellor's cautious reforms can do much good.

How so? Schröder, the meister of German politics, will no doubt perform at this conference brilliantly. The Chancellor has already made it clear to the fractious left wing of the Social Democrats that he will resign if he does not carry the day. Of course, should Schröder fail to bring his own party into line, the blow to his prestige would be unacceptable. "He would be a lame duck," says Oswald Metzger, a former Green Party member of Parliament.

But no monumental clash of wills is likely in Berlin come June 1. As much as left-wingers in Schröder's coalition dislike him, they have no credible replacement and would be loath to hand power to the conservatives by forcing the Chancellor's resignation. And Schröder's Green Party partners won't deal themselves out of government by deserting him.

A victory for Schröder and his agenda seems assured. But it's what happens after June 1 that counts. When the reforms reach Parliament, Schröder must negotiate with the opposition Christian Democrats, who control the upper house. They support the reforms in principle, and have vowed to put the interests of the nation above party politics. However, they'll be tempted to exploit Schröder's low popularity ratings. The conservatives may try to precipitate new elections, which polls show they would win easily. Or, more likely, they could render him all but powerless until his term expires in 2006.

And what if the Christian Democrats go along with Schröder? The problem is that Agenda 2010 is hardly as grand as its name. Only smaller companies will be exempt from Germany's job protection law. The pension and health-care systems face bankruptcy unless there are much deeper cuts in benefits, critics say. "There's no structural reform [in the package] that's really worthy of the name," says Johannes Reich, head of equities at Metzler Bank in Frankfurt. Agenda 2010 may slow the decline, but do nothing to stop it.

If there's reason for optimism, it's that the severity of the crisis is becoming clear to all but die-hard leftists. Centrist Social Democrats such as Siegmar Gabriel, the former prime minister of Lower Saxony, and Berlin Mayor Klaus Wowereit are among party members calling for more radical reform. Gabriel wants to cut subsidies to coal mining and agriculture. Wowereit says free universities should start charging tuition. If such voices are heard, there's still hope for Germany. Meanwhile, what Germans will get on June 1 is more politics than policy.

Ewing covers German politics and economics from Frankfurt.

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