[VIEWPOINT]Election may end ‘old ways’

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[VIEWPOINT]Election may end ‘old ways’

Germany and Japan, the strategic losers, but economic winners of World War II, are victims of their breath-taking success. Both economies have been stuck in a structural slump for more than a decade, a slump that is merely masked by their superb export performances. But now it looks as if Germany is better positioned than Japan to go through the wrenching process of transformation, and it is high time.
In two weeks, Germany will vote on a new government, and the polls have been saying for months that Angela Merkel’s Christian Democrats will oust Gerhard Schroder’s coalition of Social Democrats and Greens (“Red-Green,” as it is called). Much work has already been done by the “Red-Green.” Japan’s Prime Minister Junichiro Koizumi is fighting an uphill battle to privatize the country’s postal bank. In Germany, on the other hand, old-time state holdings like Lufthansa German Airlines, the electric utilities, the railroad and the post office are already listed companies. “Red-Green” has also gone a long way in changing the German social security system from welfare to “workfare,” following the examples set by Bill Clinton in the United States and Tony Blair in Britain.
When Mrs. Merkel becomes the first woman ever to rule Germany, which is now a safe bet, her government will attack the hardest nut of them all: a sclerotic labor market, which is hampered by lavish job-security rules, high payroll taxes and inflexible nation-wide collective bargaining agreements. The price has been mounting structural unemployment, which is stuck in the 12-percent-range.
Now, the reforms Mrs. Merkel has in mind, will not turn Germany into a paradise of “hire and fire.” But, given the enormous structural rigidities that have built up in the past 50 years, the program is still revolutionary.
Nation-Wide Collective Bargaining: The problem here is that Germany’s powerful labor unions are setting the same wage throughout the country ― whether it is in the rich and productive south or in depressed parts of the north. Obviously, that has not made for job-growth in the poor regions. Merkel’s Conservatives are dead-set on passing new legislation that would shift collective bargaining from union headquarters to the shop floor, allowing wages to be set according to local conditions. The prediction is that workers will rather work more for less than see their jobs exported to China or Poland.
Job Security: It won’t be hire-and-fire, but a lot more flexibility. Companies with less than 20 employees are to be exempted from tight job-protection rules when they hire new employees. This may not sound like much, but it will make new hires easier for employers worried about having to keep new workers on board when profits fall. Another idea is to abolish job protection during the first two years, which should also encourage new hires.
Payroll Taxes: Add-ons for unemployment benefits and social security in Germany are among the highest in the world, adding 40 percent on top of wages and turning German salaries into the world’s highest. Mind you, Mrs. Merkel does not want to cut social benefits. Instead, she wants to raise the value-added tax and use the proceeds to lower employers’ contributions to social funds. The result will be a reduction in gross wages that employers will have to pay.
Taxes: The Conservatives want to reduce the highest marginal tax rate from 42 to 39 percent, and the corporation tax down to 22 percent. Their candidate for the finance ministry wants to be even more ambitious: a flat tax of 25 percent for all. That should increase domestic spending, which has remained as flat as in Japan. In both countries, demand is strictly export-driven.
Readers who recall what Ronald Reagan and Margaret Thatcher did in the 1980s will not be impressed. But in Europe change moves slowly or not at all ― look at France and Italy. The difference between Germany, on the one hand, and France, Italy and Japan on the other, is federalism and decentralization. These centralized states, where everything must be done from the top down, are much harder to move.
Another difference is the popular mood. By giving Mrs. Merkel’s Conservatives a 15-percent lead in the polls, Germans are signaling they are ready for change. They know exactly what is in store for them when Schroder’s Social Democrats are ousted: more work, but less pay and less security. As the world’s top exporters, Germans know they can’t hide from globalization, especially since their “China” is right next door: in Poland, the Czech Republic or Estonia.
Like Japan, Germany profited from closed markets and cozy, informal cartels. But the Germans are beginning to understand that the old ways work no more ― that they will have to change and compete if they want to avoid decline. Turn on your TV on election day (September 18) to see which way Germany is going. My bet is the country will vote for change and for Angela Merkel, the first woman in German history to lead the country of Bismarck and Adenauer.

* The writer is the publisher-editor of Die Zeit.

by Josef Joffe
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