No stranger to hyperbole, German Chancellor Gerhard Schroeder has called his government's plan for curbing public spending and providing corporate tax relief "the biggest reform project in the history of the Federal Republic."
Those are, without doubt, exaggerated words. The proposals, drawn up by new Finance Minister Hans Eichel and passed by the cabinet Wednesday, do, however, represent an important first stab at the structural reforms Europe's largest economy so desperately needs.
Besides saving 30 billion marks ($16 billion) in next year's budget, Eichel's plan calls for a consistent reduction of government borrowing and a balanced budget within six years. Starting in 2001, the corporate tax rate will drop to 25% from 45% and although other taxes and the closure of some loopholes will keep the effective tax rate higher around 35%, businesses will see their overall tax burden lightened by around 8 billion marks.
Predictably, the numbers are eliciting cheer from the stodgy German business community. And equally predictably, trade unions are sneering that it's socially unbalanced, while opposition politicians have attacked its plans to index pensions to inflation instead of average wage increases.
All the rhetoric over details, however, misses the real reform. Rather than remaining mired in the Schroeder coalition tradition of lurching from crisis to crisis, the budget suggests a new sense of direction and momentum is building.
"This is definitely a step in the right direction," says Irgeen Rust, an economist for
in Dusseldorf, about the proposed reforms. "The specifics aren't so important as the fact they're finally doing something."
Putting a priority on getting government finances in order reflects well on Eichel, almost everyone agrees. While some may quibble that his plan perhaps doesn't go far enough, in a country where change is a dirty word and reform is viewed as a threat to the welfare state, anything more ambitious would likely have been a nonstarter. "If you want to cut spending, you're not going to make very many friends," Eichel told reporters after the first criticisms began to surface.
The Felix Unger of Finance
Compared to Oskar Lafontaine, his predecessor, however, it shouldn't be very hard for Eichel to garner the support he needs in the business community. Eichel is a political Felix Unger, meticulously ensuring the government's finances are neatly folded and organized.
Lafontaine, by contrast, was an unreformed leftist whose grandiose and ill-fated plans ranged from setting up global exchange rate zones to priming the domestic economy with old-school Keynesian remedies. Much like Felix's messy roommate, Oskar wasn't big on details or practicality and the business community sighed with relief when he suddenly resigned in March.
At that time, German financial markets and the new single currency, the euro, all blipped higher. While markets haven't offered a wholesale endorsement of Eichel's reform package, both the
and the euro firmed after it was announced. Many expect it will help revitalize the languid German economy, which is expected to grow by only 1.5% this year and remains burdened by unemployment of over 10%. Because Germany makes up more than a third of the total euroland economy, the reforms will also serve to underpin the euro.
Reviving business confidence in the world's third-largest economy would naturally have salubrious effects far beyond Germany's borders. And while they may not be the most sweeping reforms undertaken in post-war Germany, Schroeder could say they'll prove the most important his coalition has put forth.
And that won't be an exaggeration.