Turning Around the German Economy

If only the aftermath were as exuberant and bubbly as the moment of victory.

Two weeks following his ebullient, nail-biting re-election, Chancellor Gerhard Schröder and his Social Democratic Party (SPD) cohorts met on Monday with representatives of the Green Party to hammer out the details of the next four years of their coalition government. And like the previous four years of government, the talks take place amid the sober reality of Germany’s current economic misery.

The two partners are faced with an unemployment rate that is likely to go up, not down, in the coming year, an ever-rising debt and a bloated social welfare system in bad need of reform. Their response, at least after the first day of talks, has been to maintain a strict savings course in face of a 10 billion euro budget deficit and begin eliminating state subsidies.

”We will not leave our consolidation course,” Fritz Kuhn, chairman of the Green Party, told reporters.

Read my lips: no new tax hikes

Kuhn and his neogtiating partners also ended speculation that the new red-green coalition, named after the colors identified with the two parties, would raise taxes to increase the government's paltry income.

Tax money this year is already 3.5 percent less than last year and state spending is putting Germany on bad terms with its European Union neighbors. Should debt increase, Germany will break an EU rule that debt should be no more than 3 percent of annual Gross Domestic Product -- a rule the country helped craft.

Social democratic state premiers had suggested over the weekend hikes in property, inheritance and the tobacco tax were necessary in order to change Germany's miserable economic situation.

The suggestion caused an uproar in the opposition parties and among the country's editorialists alike. Finance experts said taxation would be "poison" for Germany's economic turnaround.

Chancellor Gerhard Schröder said Monday night that talk of tax hikes was "very annoying". He said the coalition negotiations would focus on cutting subsidies and eliminating "excess" tax priveleges and subsidies.

Labor market reform, but when?

Some coalition politicians and financial experts say a little trimming here and there won't solve Germany's slow growth and unemployment, which is now hovering between 4.5 and 4.7 million.

The country's over-regulated labor market and massive social security costs have laid a heavy burden on the economic turnaround.

Schröder used an August report by a commission of experts headed by Volkswagen board member Peter Hartz to soothe voters' fears in the final weeks leading up to the election.

But experts doubt all of the recommendations made by the commission can be applied. Many have been criticized by industry leaders.

Should Schröder try to implement any of industry's labor market recommendations he will run into problems with the unions, who helped him keep his job. Schröder already made clear that among the subsidies to be cut, the coal industry's 2.78 billion euro subsidy won't be among them.