Why Germany Can't Create Jobs ; European Union Leaders Meet Tuesday in Brussels in a Bid to Revive Europe's Stagnant Economy

Article excerpt

In a sputtering economy, Niles Werke shows how to get the German locomotive running again. The century-old machine-tool company is at the top of its field. Sales are expected to rise by 10 percent this year. "We expect 2005 to be another good year," says Frank Reichel, director of its Berlin plant.

Defying a lagging economy, Germany's flagship engineering sector is booming. But despite plants that hum at capacity, companies like Niles aren't hiring.

Its failure to create jobs is miring Germany in a political and economic crisis, making the country ground zero in a growing debate over Europe's economy. At a meeting in Brussels Tuesday, European Union leaders - who want to make Europe the world's most competitive economy by 2010 - are expected to renew calls that Germany, like other countries in Western Europe, reform its labor protections and social welfare systems to boost growth.

When Chancellor Gerhard Schroeder took office in 1998, 3.9 million Germans - 10.2 percent of the workforce - couldn't find jobs. Last month, that number reached 5.2 million - 12.6 percent.

Mr. Schroeder's center-left government, which campaigned on a pledge to create jobs, has issued bold economic and social welfare changes, including tax cuts, expanded shopping hours, healthcare and pension reform, and a controversial cut in unemployment benefits intended to encourage people to get back to work. But none of those steps have improved Germany's chronic job crisis.

Fearing continued voter backlash in key state elections, the German government last week held a "jobs summit" with opposition leaders. It emerged with a plan to slash the corporate tax rate to 19 percent, from 25 percent. And it pledged relief for mid-sized companies and increased public investment in infrastructure and education.

The new set of proposals are motivated as much by politics as by economic reality. Schroeder's party, the Social Democrats, suffered a setback in a state election this month and fear losing their traditional stronghold, North Rhine-Westphalia, to the opposition Christian Democrats in a state election later this month.

The government can point to some improvements. Booming exports amid a sluggish economy testify to the improved competitiveness of German companies. Indeed, economists at ABN Amro, a global banking group, report that German companies are more competitive than their rivals in Italy.

European Commission statistics show that Germany's unit wages, which have been among the highest in the 25-nation bloc, have fallen 10 percent compared to the EU average in recent years. …