Financial Daily from THE HINDU group of publications
Friday, Jul 16, 2004
Industry & Economy
Germany unveils key economic reforms to bolster growth
Brussels , July 15
THE German Parliament introduced key economic reforms, which had dodged Chancellor Schroeder's coalition Government for some time. The current economic malaise has been highlighted by four years of consistent and embarrassing economic stagnation.
The German economy $1.3-trillion locomotive economy of Europe and the world's third largest economy after the US and Japan is seen making a bold attempt to introduce major reforms to boost the stagnant economic growth. The quest is also to improve productivity and above all trim manufacturing costs. The German welfare states' agenda is rated as "deepest cuts in social benefits for half a century''.
With German the economic growth averaging just 0.3 per cent a year since 2001 and unemployment in May at 10.5 per cent of the workforce, Germany is passing through a traumatic economic phase.With record high social and welfare benefits, the cost of skilled worker for a German employer is almost 40 to 25 per cent higher than that to employers in the US and Japan.
The German Chancellor initiated a major reform programme "Agenda 2010" in May 2003, to improve Germany's competitive edge. The strategy is to cut social benefits, trim pension contributions by employers and employees and above all improve the workers' productivity to retain the country's traditional competitive edge in global market place.
Due to recessionary economic climate, employment has contracted and unemployment has climbed steadily since January 2001. Currently there are more than 4.15 million jobless workers in Germany, which is more than ten per cent of the active working population.
Under the proposed reform programme Chancellor Schroeder's - coalition Government of Social Democrats and The Greens or Red and Green coalition Government - proposes to cut income-tax by Euro 21.5 billion from now till the end of 2006 to pave way for more investments by companies to modernise their manufacturing facilities. The Government proposes cutting levies on low-paid jobs, easing lay-off for small employers, and turning dole offices into job centres.
Above all the Government will cut long-term unemployment benefits. In the health sector, it proposes to impose a flat fee of ten Euros per quarter for visits to family doctors and restricting the State funding for prescription drugs.
The Government is also proposing to introduce key pension reforms, which may scrap early retirement incentives and State pension contributions will be capped. It may also subsidise some private pension schemes to relieve burden on the State pension schemes.
Current welfare spending accounted for 50 per cent of the Government spending in 2002 and a study by Deutsche Bank showed Germany outranking France, Italy, Britain, Spain, the US and Japan in terms of welfare spending and social benefits paid for by the Government.
Obviously, the cost of skilled worker in Germany is higher than the current levels in the US and Japan.
After three years of nearly no growth, analysts today predict that German economy may register 1.8 per cent growth by the end of this year. The exports are improving and with further improvement in reduction of labour costs, the country is poised to retain its competitive edge in the global market place.
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