Commentary: Germany: What's Paralyzing Reform

The opposition's grip on the upper house is blocking any action on the economy

People who talk privately with Germany's top politicians always come away puzzled. From Chancellor Gerhard Schröder on down, German leaders all seem to grasp the urgent need for the country to restart growth by loosening up the labor market, cutting taxes, and trimming the welfare state. Yet year after year, little or nothing happens.

"Everybody understands these things are necessary, but that doesn't mean anything in Germany," laments Peter Glotz, a former secretary general of the Social Democratic Party who is now a leading advocate for reform.

In fact, Schröder's Agenda 2010, the most ambitious package of reforms in years, is in danger of losing impetus as it crawls through Parliament. That's true even though Schröder's Social Democrats and Green Party allies control the Bundestag, the lower house. The problem is that much of the Agenda 2010 legislation requires approval from the Bundesrat, the upper house that represents the interests of the German states. And the Bundesrat is controlled by the opposition Christian Democrats, who are doing what opposition parties always do: use every trick in the book to mess up the ruling party's plans. "The Bundesrat chokes reform," says Anne-Marie Le Gloannec, a German specialist at the Centre Marc Bloch, a Berlin think tank.

Now a growing number of people both inside and outside government are concluding that the political process itself is part of the problem. A movement is gathering steam in favor of reforms that would roll back the Bundesrat's power to veto most legislation and make it easier for government to take decisive action. Parliament has acknowledged the pressure for change by appointing its own bipartisan Federalism Commission, scheduled to meet on Nov. 7.

The time is right. Germany's postwar system was built for stability, not flexibility. The constitution's drafters were understandably keen to avoid repeating the chaos of the Weimar years. But the problem today isn't a weak democracy. The biggest threat to stability today is the 4.2 million unemployed, a direct result of successive governments' inability to make basic economic reforms. "We are checking and balancing ourselves to death," says Hans-Olaf Henkel, IBM (IBM ) Germany's former CEO and chairman of Convent for Germany, a new group advocating political reform.

All fingers point to the Bundesrat, which comprises state prime ministers and their top ministers. Because state and federal elections don't coincide, the Bundesrat often has a different political complexion from the Bundestag, and its leaders often include people who aspire to be Chancellor. That's the case now with two conservative state prime ministers, Roland Koch of Hesse and Edmund Stoiber of Bavaria. Both have a strong interest in seeing Schröder fail and are using the Bundesrat to promote their ambitions. "This makes it hard for the Chancellor to make a deal," says Roland Berger, chairman of Munich-based Roland Berger Strategy Consulting.

The result is political paralysis. The economic well-being of the nation -- indeed all of Europe -- is held hostage to the parochial interests of a few ambitious state leaders. And the problem is getting worse as more and more legislation has to pass through the Bundesrat. In 1970, a manageable 30% of all legislation affected state finances or administration and thus needed Bundesrat approval. But the percentage has doubled as the states have become more dependent on the federal government for money.

The obvious solution is to give more financial autonomy to the states, including more power to levy taxes. That would shrink the upper house's power at the federal level, because legislation that doesn't affect state finances doesn't need Bundesrat approval. There would be other benefits. Parliament would spend less time mediating money disputes among the states, and the states would have more control over their own fates. The constitutional changes, which require a two-thirds majority in the Bundestag and a simple majority in the Bundesrat, won't be passed in time to help Schröder this year. But in the future, Germany will have more success reforming its economy if it also reforms its politics.

By Jack Ewing

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