Independent Perspective News

Germany’s government and opposition have agreed a reasonably ambitious package of health-care reforms, two months after the French government pushed through changes that will make its pension system less generous. With Europe’s economies still in the doldrums, are the opponents of reform losing their taste for a fight?

BY MANY standards, the health-care reforms unveiled by Germany’s government on Monday July 21st, with the vital support of the opposition, are far from revolutionary. The levy on companies for their employees’ health care is set to fall from 14.4% to a still-hefty 13% by 2006, and the overall national health bill is not expected to decline: the new plan simply transfers costs by making individuals pay for things like dentures. The health minister, Ulla Schmidt, was forced to drop more dramatic proposals, like allowing health funds to have contracts with individual doctors, rather than collective agreements with doctors’ associations. Even so, the reform is radical by German standards, and Ms Schmidt hopes that increased transparency will cut down on fraud and increase efficiency. Moreover, the government’s success in getting even this measure of reform enacted is a sign of a new realism in Germany about the extent of the country’s economic malaise.

Germany is not alone. In neighbouring France, the centre-right government of Jean-Pierre Raffarin has succeeded in driving through unpopular pension reforms that had brought hundreds of thousands on to the streets in protest. And this week, the government slayed another sacred cow, cutting the high, fixed interest rate on France’s biggest savings scheme, the Livret A. And Italy’s prime minister, Silvio Berlusconi, talks of making it easier for companies to fire workers, though he has not made as much progress as his northern neighbours. Are things now so dire in Europe that its people are finally accepting reform, albeit grudgingly?

The situation is certainly desperate, and nowhere more so than in Germany, which has enjoyed the dubious distinction of being the slowest-growing member of the European Union for three years running. Indeed, some economists are forecasting that its economy will shrink slightly this year; industrial production and manufacturing orders are falling. Even more worrying for many Germans is the fact that unemployment is over 10%; in the formerly communist east, it is above 18%.

Germany’s performance is an embarrassment for its chancellor, Gerhard Schröder, who failed to use his mandate when first elected in 1998 to push through economic reform. Only this year, with the economy still reeling, has he come up with a broad reform package, known as Agenda 2010. This plan includes a reduction in Germany’s generous unemployment benefits, making it easier for small companies to hire and fire (though workers in bigger companies will retain strong protection against dismissal), as well as some pension and health-care reforms. The government claims that cuts in tax and social-security contributions have already resulted in an additional 930,000 part-time and temporary jobs.

The government is also cutting income taxes and has accelerated the cuts, which will now take effect next year. Some euro22 billion ($26 billion) will be cut from workers’ tax bills from next January—equivalent, Mr Schröder says, to a 10% tax cut for the average worker. In an effort to get workers to spend the extra money, the government has loosened laws restricting store-opening hours.

Not surprisingly, Mr Schröder’s reform efforts have been vigorously opposed by Germany’s trade unions. But the unions’ grip on the economy is loosening. IG Metall, Germany’s most powerful union, went on strike for shorter working hours last month but was defeated, for the first time in half a century. This led to a leadership crisis, though in the end the union’s chairman, Klaus Zwickel, agreed as originally planned to move aside for the man who had been the driving force behind the disastrous strike, Jürgen Peters. The new boss has his work cut out: IG Metall remains deeply divided and its power is waning, with membership continuing to fall.

But Germany’s reformers still have a long way to go. Mr Schröder has yet to lay out exactly how he is going to tackle the country’s pension problem. Like France and Italy, Germany suffers from a killer combination of an ageing population, low birth rates and generous pension provision. In France, Mr Raffarin’s government has made a start, with proposals to make employees pay more, over a longer period, towards their retirement. Like Germany’s reforms, the plans fall short of what is needed to avoid further wrenching changes down the road. Even so, they met with outrage from the unions, sparking several marches and general strikes that paralysed the country. No doubt, the unions thought they could defeat the plans—after all, the last time a French prime minister had attempted such reform, he was booted out of office. But they had not reckoned with the changing public mood: the middle classes’ patience with endless strikes seems finally to have snapped. Given its success on pensions, the government is planning to push ahead with more privatisation and reforms to the health-care and education systems and public services.

The attempts by Germany and France to deal with their stagnant economies bear striking similarities. Both are attempting to implement structural reforms, while cutting taxes, and both are certain this year to breach the stability pact’s 3% limit on budget deficits for countries within Europe’s single-currency area. The limit has already attracted widespread criticism for being too inflexible during an economic downturn. So, it may be that both countries will simply burst through the limit, and support each other in voting against the large fines that offenders are supposed to pay. Or they may use the threat of breaching the limit as a tactic to persuade opponents of reform, such as the unions, of the need for dramatic action.