Sunday, Oct. 26, 2003

Risking His Own Welfare

By CHARLES P. WALLACE | Berlin

The headquarters of Gerhard Schröder's Social Democratic Party was under siege. Thousands of protesters blowing whistles, waving red banners and chanting slogans surrounded the building last week, their anger fueled by the German Chancellor's latest efforts to revamp his country's economy. The new provocation: a vow to cut state pension benefits next year. HANDS OFF OUR PENSIONS, screamed one banner. The demonstrators were a mix of disgruntled union members and the elderly, including a contingent from the Gray Panthers, an advocacy group for the retired that has about 8,000 members in Germany but punches above its weight in policy debates. "It's inconceivable that the generation that rebuilt Germany and paved the way for a pleasant life for the next generation is now treated so shabbily," fumed Panthers' spokesman Norbert Raeder.

The Panthers' rage runs deep. But so does Germany's economic crisis — and it may not be possible to solve it without leaving retirees feeling betrayed. Since World War II, Germans have regarded the state pension scheme as untouchable. Now the aging population and moribund economy make reform essential. To close an €8 billion pension deficit, Schröder froze pensions for next year and announced that nursing-care insurance costs for retirees will be doubled, effectively cutting total benefits. Together with the restructuring of unemployment benefits and revision of the health-care system passed last month, Schröder's moves are slowly adding up to one of the most determined efforts to shake up Germany's welfare state in more than 50 years. Has Schröder — who deftly avoided this sort of painful decision in his first four years in office — finally seen the light?

The Chancellor's critics doubt it, suggesting that Schröder is up to his old trick of tweaking the system at the margins. "There is no coherence behind the reforms," says Jürgen W. Falter, a political scientist at the Institute for Political Science in Mainz. "The idea is to get along, cut costs and muddle through." Falter and others suspect Schröder is just responding to each financial crisis with short-term solutions, rather than implementing a comprehensive reform program to jolt the economy out of its slump.

Schröder did back away from one key reform last week that was urged by both his own advisers and the opposition Christian Democrats: raising the retirement age to 67 from the current 65. That reform is necessary because people are on average living far longer, and more workers are needed to fund the rising pension costs. But Schröder said lifting the retirement age wasn't necessary until 2010. His opponents suggest Schröder had another motive for saying no. Raising the retirement age is universally unpopular, while the pension cut affects only the elderly, who overwhelmingly vote for the Christian Democrats anyway.

While Schröder's decision angered union members and older people, it pleased business leaders and financial analysts. Non-wage labor costs, such as pension contributions and health-insurance payments, are hobbling the economy. They amount to 42% of the average German salary, among the highest in the world, and keep companies from investing in the country. In his reforms Schröder has been trying to keep these costs down, or at least slow their growth. Economists warn that if Germany allowed pension contributions to rise from the current 19.5% to 20.3%, as had been considered, it would cost the country 100,000 jobs. Schröder's reforms, along with a promised €15 billion tax cut next year, could help the economy grow by an additional 0.5% of GDP next year, according to Holger Schmieding, European economist at the Bank of America in London. "This is better than any observer dared to hope only a year ago," he says.

Is Schröder committing political suicide by tackling the pension crisis? The numbers aren't good. A poll taken by the state-run television network ZDF after the pension cuts put the Schröder government's approval at just 22%, the lowest for a serving Chancellor since the survey began in 1977. The Christian Democrats polled 53%. Another survey, published last week by Infratest-dimap, showed that 79% of Germans do not believe their pension is safe anymore, a figure that increases to 91% of people who will retire in 30 years. And the Chancellor's reformist zeal is alienating the left-wingers in his own party. "This series of decisions — health-care reform, unemployment cuts and now pension plans — adds costs for working people," says Sigrid Skarpelis-Sperk, one of six leftist SPD "skeptics" in parliament. "During a recession, they are completely wrong."

But Schröder may be playing a longer game. His repeated threats to resign if his reforms aren't passed have largely tamed his party's truculent left wing, and the country's once powerful unions are struggling to reassert their influence after losing a major strike in eastern Germany in June. So the Chancellor may be calculating that the flap over pensions will soon pass, and the economic benefits of his reforms will kick in just in time for his 2006 reelection bid. "He had to adopt the unpopular things very early in the legislative term," says Josef Janning, head of the politics division at the Bertelsmann Foundation, a Gütersloh-based think tank. "By 2006 people will have forgotten all the cruelties of 2003."

Schröder's reforms put the opposition CDU in a bind. CDU leader Angela Merkel has already announced her support for reform, and even suggests much tougher plans than Schröder's, like raising the retirement age and charging a flat fee for health insurance. This tougher line scared leftists in Schröder's party into supporting the Chancellor, and made it less likely that the CDU could bring the government down.
But the Chancellor is not yet out of the woods. Economists generally applaud the latest batch of reforms as a good start, but most say they don't go far enough. Among the reforms still being sought by big business and economists is a more thorough shake-up of the labor market. Schröder's proposals, adopted two weeks ago by the lower house of parliament, cut unemployment benefits from 32 months to 12 months in an effort to force the long-term jobless to accept work. Now economists say job- protection rules that prevent large companies from laying off staff during economic slumps need to change. Firms that can't fire employees, they argue, won't hire in the first place. They also urge that the system of nationwide wage settlements be abandoned, or at least reformed to allow companies more flexibility. And they say the health-care reforms, which basically shifted some costs from employer to employee, should be expanded to allow more competition, bringing costs down. "We need more serious reforms, otherwise the living standards of Germans will sink," says Joachim Scheide, an economist at the Kiel Institute for World Economics. "No other developed country has such a pessimistic prognosis."

Schröder's reform package must still be approved by the Bundesrat, the upper house of parliament, which is currently ruled by the Christian Democrats. But the battle in the Bundesrat could prove more difficult for the CDU than for Schröder. Merkel has already warned against blocking the reforms along party lines. "People don't want us to drive the country against the wall," she says. She even favors amending some of the proposals to make them tougher. But Roland Koch, premier of the state of Hesse and one of Merkel's rivals to challenge Schröder in 2006, has said he will try to blockade the reform package to bring down the Schröder government. With a power struggle under way in the top ranks of the Christian Democrats, the party's rank and file don't know who to support or which policy to promote.

The question now is whether Schröder has the moxie not only to overwhelm the left wing of his party but also to convince his opposition to put aside political differences to pass the reforms. He already enjoyed some success with his health-reform measures, which received bipartisan support and sailed through parliament. But with influential special-interest groups like the pensioners on the prowl, the Chancellor can expect a long and nasty fight.