Commentary: Germany: Welfare Reform Won't Cut It

Schröder needs to help business create jobs, not just slash the dole

From Dortmund to Dresden, some 70,000 angry Germans took to the streets on Aug. 23 to vent their rage over recently approved cuts in unemployment benefits. One group of protesters hoisted a symbolic coffin overhead labeled "Germany's future." Government officials say protesters are simply poorly informed about the changes. Dubbed "Hartz IV," after Peter Hartz, the Volkswagen executive who headed a national commission on labor reform, the law takes full effect in 2006. Under the new rules, an unemployed single worker who previously netted $1,097 a month in long-term unemployment benefits will have to get by on $801. Even with the cuts, German jobless benefits will remain well within the European average, economists say. Still, by reducing the payouts, policymakers hope to give Germany's 4 million unemployed a greater incentive to get off the dole.

It's a worthy goal, but the fact is, Chancellor Gerhard Schröder has failed to push through enough free-market reforms during his six years in office to juice job growth. The situation is especially grim in the east, where 36 applicants vie for each opening. So instead of diving back into the labor market, Germany's jobless are being forced to jump into an empty pool.

Schröder must deliver some gains along with the pain. His center-left government needs to move quickly to create the conditions necessary for German companies to begin hiring again. A first step should be to overhaul the anachronistic system of national wage agreements. The deals, negotiated between labor unions and employers' associations, apply to entire industries -- and deprive companies of the flexibility to negotiate wages locally or to adjust their staffing levels to the ups and downs of the business cycle. Years of generous settlements have pushed Germany's wage levels so high that many positions are now priced out of the market -- forcing companies to transfer production to Poland, India, or China.

Businesses have gotten so desperate that they have devised their own deals. Wielding the threat of offshoring, companies such as Siemens (SI ) and DaimlerChrysler (DCX ) have recently negotiated agreements at some of their plants to safeguard jobs in exchange for a longer workweek without higher pay. That's encouraging. But Schröder's government ought to send a clear signal to the rest of Germany Inc. by legally allowing companies and workers to deviate from union contracts under certain conditions. "Germany needs to break the cartel between unions and employers that has led to non-market wage levels," says Elga Bartsch, executive director at Morgan Stanley (MWD ) in London.

Germany's jobless might be more willing to swallow the government's bitter medicine if it was accompanied by serious measures to cut government waste and spur economic growth. Imagine how an unemployed engineer feels knowing that the state still shovels billions into the unprofitable coal industry -- supporting every worker to the tune of $85,000 annually. Schröder needs to get serious about cutting $150 billion in such state aid to many industries, and implementing controls on billions in ineffective transfers to east Germany. It would be smarter to spend taxpayer money on education, support for entrepreneurs, and research into new technologies -- policies that Finland and Ireland have used to boost economic growth.

Last but not least, the government should force the public sector to do more belt-tightening of its own. It's no secret that the sprawling labor office, with its $66 billion budget and 90,000 civil servants, is miserably ineffective. In 2002 the agency was caught falsifying statistics to improve its poor image -- a scandal that prompted reform. Yet the institution is adamantly resisting change.

Government officials insist they are tackling obstacles to growth on all fronts and that reforms need time to take effect. But how much time does Germany have? Maybe the protesters carrying that coffin know something the government doesn't.

By Gail Edmondson

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