Waiting For Thatcher In Germany

From third way to Thatcherism: Gerhard Schröder has succeeded in persuading the Bundestag to cut taxes and unemployment benefits. Twenty years late, has Thatcherism finally arrived in Germany?
Every President since Reagan has been riding on his coattails — his tax cuts, to the extent they helped reduce the fiscal burden, deregulation and the 1982 recession that killed inflation — and, likewise, every British Prime Minister has been riding on Margaret Thatcher’s coattails as well. The changes she made were far more bold and extensive than those of Reagan — privatization of major industries such as steel, railroads and the like — and she turned Britain into a dynamic economy with low unemployment, good growth and low inflation.

Germany seems to be taking baby steps in Thatcher’s direction: modest reform of unemployment insurance, cuts in the marginal tax rates and the elimination of some subsidies. All good news, if too timid. Still, every little bit helps.

Germany went through a difficult time absorbing East Germany in the early to mid-90’s and made the mistake of trying to equalize wages across the country even though the productivity differences between east and west were huge after decades of communism in the east. Hopefully the current reforms will bear fruit and will inspire more reforms, particularly in the labor markets.

IT TOOK an Iron Chancellor, Otto von Bismarck, to introduce the first rudiments of social insurance to Germany, back in the 19th century. Many Germans think it will take a leader of equal determination to roll back the welfare state that has grown in complexity and generosity ever since. Some, indeed, say sotto voce that Germany needs its own Iron Lady, as Margaret Thatcher, Britain’s prime minister in the 1980s, was known, to confront the vested interests that stand in the way of reform and withstand the accompanying unpopularity.

Thus far in his chancellorship, Gerhard Schröder has displayed many political virtues—charm, pragmatism, tactical nous—but unbending determination has not been prominent among them. On Friday October 17th, however, he passed an important test. A package of tax reforms and benefit cuts was voted through by the Bundestag, the German parliament’s lower house, in which Mr Schröder’s coalition holds only a fragile majority. Most of those reforms will now go to the upper house, the Bundesrat, controlled by the conservative opposition. They will try to amend the proposals, and will certainly delay their passage into law, but they cannot overturn them. Besides, by threatening more far-reaching changes, the conservatives in the upper house may only strengthen the cause of reform.

The cause is increasingly urgent. Around 4.2m Germans are unemployed. Economic growth, which was painfully slow in 2001 and 2002, has this year ground to a halt. By year’s end, tax revenues will fall short of public spending by about €80 billion ($93 billion) or 3.7% of GDP. Despite this hole in its finances, Germany’s government is still wasting money on a long list of subsidies of dubious economic merit. It spends €10 billion subsidising new housing and home ownership, helping people to leave the inner cities; while doling out €6 billion more on tax breaks for commuting, helping people travel back to the city to work. Meanwhile, Germany’s manufacturers, who still provide around 20% of German jobs, struggle under the burden of social-insurance contributions and payroll taxes that add almost a quarter to their labour costs. Talk of a “German malaise” is rife. Dominik Geppert, a historian, is enjoying some success with a new book entitled “Maggie Thatcher’s Radical Cure—a Prescription for Germany?” But Germany is, as Mr Geppert notes, a “land in slow-motion” which specialises in “retaining the status quo”. Mr Schröder’s modest reforms, therefore, have encountered stiff resistance.

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When he first came to office Mr Schröder most closely resembled not Lady Thatcher, but Britain’s current prime minister, Tony Blair. In his early years, the German leader frequented summits with like-minded centre-left leaders, and he even issued a joint statement of principles, dubbed the “third way”, with Mr Blair. Five years later, Mr Schröder may be realising how much Mr Blair owes to Lady Thatcher. By breaking the post-war consensus and emasculating the unions, she paved the way for a new Labour Party more in tune with the British electorate and less in hock to the union bosses. Crisis or no, Germany still clings to that consensus and its largest union, IG Metall, was unrestrained in its barracking and haranguing of the chancellor at a rally recently. For the moment, Mr Schröder is undeterred. But he has a lot more scrapping ahead of him.

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