Promises? (Gerhard) Schroeder's New Germany

By Wu, Xiao | Harvard International Review, Winter 1998 | Go to article overview

Promises? (Gerhard) Schroeder's New Germany


Wu, Xiao, Harvard International Review


Gerhard Schroeder, Germany's debonair new chancellor, faces a Herculean labor: the challenge of leading Germany into the twenty-first century in the face of mounting economic obstacles.

Unemployment stands at a daunting 10.4 percent, roughly 4.4 million people, with even higher numbers in former East Germany. Before the elections, images of Schroeder loomed over Germany on giant billboards promising comprehensive reforms. Now that the afterglow of election-night triumph has faded, questions remain as to whether Schroeder will be able to deliver on his promises.

Schroeder may have led the Social Democratic Party (SPD) to electoral victory, but many Germans remain unconvinced of his personal power. Because he leaned more toward the center than most of his SPD colleagues while serving as Premier of Lower Saxony, he remains a relative outsider within the SPD. In fact, most SPD members find their spiritual leader in Oskar Lafontaine, the new Finance Minister. While the left-leaning Lafontaine claims to support pension reform and business deregulation, many pundits suspect that he actually favors traditionally socialist measures of wage hikes and increased government spending. Lafontaine will likely push Germany toward a less restrictive monetary policy, increasing averages wages across Germany. The result could be disastrous for the national economy.

To lower unemployment, Schroeder must reduce the tax burden that chokes mid-sized German businesses. German companies face the highest corporate income tax among members of the G7--approximately 45 percent of earnings. In addition, Germany extended a generous welfare and social security program to the eastern provinces after reunification at an astronomical cost to the economy. Presently, the social security tax extracts 42 percent of wages, the burden shared equally between employers and employees. This suffocates many companies, particularly small and mid-level businesses; 2.5 million jobs have been eliminated since 1991. Many large companies, such as Daimler-Benz and BMW, have long since transferred their assets and jobs abroad in order to avoid high production costs in Germany. For the ruling party, which must deal with the economically underdeveloped East and its 20 percent unemployment rate, any cuts in social security would be a dangerous political move. The successor to the East German Communist Party performed impressively in this year's elections and will be holding seats in parliament. Any radical cuts in social security could lead to instability. Small, gradual changes can be implemented without great social cost. Yet Schroeder and his government have not come up with a comprehensive plan for reform.

In an election focused more on rhetoric and media image than on policy discussion, Schroeder skirted questions about how he would reduce unemployment.

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