The Hindu Business Line : Germany's 'grand coalition' encourages enterprise

THE current stability and performance of Germany's $1.7-trillion economy is the subject of speculation as the world's third largest and Europe's "locomotive economy" transmits mixed signals.

Since last Friday, Germany's newly-elected coalition government of Christian Democrats and Social Democrats, led by Ms Angela Merkel — Germany's first woman Chancellor — have entered into a "working alliance" with key ministers on both sides displaying enthusiasm to initiate major fiscal and economic reforms.

The strategy is to further boost German productivity — currently highest in Europe and almost on a par with the United States and Japan — and reduce labour cost in the manufacturing sector, the highest in the world.

A skilled worker in Germany's auto industry costs $33 per hour compared to $28 per hour in Japan and the US.

Germany's labour costs are high due to generous welfare perks. For example, the average German worker enjoys the highest number of holidays per year and benefits from generous welfare handouts, irrespective of whether he/she is employed, unemployed or even on a holiday. Despite such high welfare costs, and a growth rate of less than 1 per cent Germany is the world's largest exporter and average German families today enjoy an unprecedented high standard of living.

The "grand coalition" government led by Ms Merkel proposes to initiate key economic, social and fiscal reforms to further boost the country's productivity and prosperity.

However, there are conflicting perceptions about the success of these reforms and the more pessimistic view is that German economic "malice" will continue indefinitely and many suspect that politicians on both sides of the "grand coalition" fence are, at best, positioning themselves to face prospects of an early election predicted to take place within eighteen months.

Ms Merkel is widely rated as a "stop gap" leader and apart from her spectacular rise to top leadership in the Christian Democratic party, she has no legitimate track record of being a key reformer. Ms Merkel is often rated as a "career politician of no consequence. "

The new administration proposes to boost three percentage point in sales tax — ostensibly to balance the budget and keep the budget deficit below 3 per cent of GDP, as per the European Union's guideline. It is argued that this strategy may have a "crippling effect" on the German economy, as domestic demand is weak. The German consumer is spending less, and the majority of Germans are on a "saving spree" in the event of the widely predicted economic "rainy day".

Germany has the world's highest tax-to-GDP ratio and the current economic malaise on the domestic front is compounded by sluggish domestic demand. German department stores and small retail shops are adopting new techniques to attract more customers.

Unlike earlier governments that followed traditional "socialist" policies, the new government is trying to encourage "entrepreneurial culture" to bring down unemployment, and more Germans are encouraged to set up their own businesses instead of looking for employment.

This strategy to encourage private enterprise, it is said, may work as younger and educated Germans are keen to set up their own businesses.

While this may be a novel concept in post-war Germany, it is a well-established tradition in Britain and France and strongly backed by migrant communities. The British Indians from East Africa and India have emerged as a prosperous and self-dependent minority in Britain.

In Germany, many of the two million Turks are busy setting up their own shops and businesses instead of looking for employment. In France, many North African Arabs have emerged as a prosperous community, although the vast majority of French Arab and African population continue to look for employment and remain unemployed.

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