Can Germany reform?

Germany looks like it could have a new Chancellor, Angela Merkel, on 18 September. But will she have the courage to undertake far-reaching reforms needed? Maybe she does, if her preferred finance minister is any guide. The Daily Telegraph story, headlined Economic radicals join German contender's policy team, reports today:

Germany's Christian Democrats yesterday picked a tax revolutionary and high-brow eurosceptic to head their economic team in the lead-up to the elections next month, signalling a shift in strategy from gentle reform to more radical thinking.

Dr Paul Kirchhof, who takes charge of public finances, is a Heidelberg law professor, former judge and taxd reformer. He is no centrist:

Dr Kirchhof wrote the landmark 1993 ruling on the Maastricht Treaty stating that Germany reserved the right to strike down any European Union directive that breached its own constitutional law. ...But he is best known as a critic of Germany's arcane tax system. In 2001 he drew up proposals to slash the top rate of income tax from 39pc to 25pc, while abolishing a dizzying range of 163 tax exemptions to offset the loss in revenue.

That's almost a flat tax. Not surprisingly, Germany's BDI industry federation said it was a "magnificent appointment" that would help kick off a new era of economic growth. Others were more sceptical. According to Bertrand Benoit in today's Financial Times:

“Kirchhof’s concept is good,” said one private sector economist who declined to be named. “But a flat tax is not politically doable. People here feel very strongly about having a progressive system.” One US economist said Mr Kirchhof’s blueprint “was legally attractive and fairer than the current system, but not competitive internationally. Capital, which is more mobile than labour, must be taxed less heavily than wages if you want it to stay in the country.”

However Merkel also appointed Peter Müller, the popular state premier of Saarland, to cover the economy and labour. He has the rare distinction (for a conservative) of being a long-standing trade union member. Labour reform is critical if Germany is to reduce its double-digit unemployment rate. German business leaders are seeking labour reforms after the election, according to Richard Milne in today's FT (subscription required):

German business leaders want next month's election to result in labour reforms that would extend working hours, increase flexibility and facilitate the hiring and firing of workers. In interviews with the Financial Times, chief executives of Germany's biggest companies expressed hopes for change after the poll. German business has not backed a specific candidate.

They will not be pleased with Müller's appointment. He belongs to the CDU’s left wing, and according to today's International Herald Tribune is no enemy of labour:

Merkel also gave a nod Wednesday toward the wing of her party that still cultivates close relationships with Germany's labor unions. ...Müller, who last year won a landslide victory over Schröder's Social Democrats, has rejected any abolition of rules against quick job dismissals, and has supported the party's more moderate stand on tax policy.

So, if Merkel wins next month, economic policy may come down to a struggle between a conservative academic and judge considered to have radical but impractical ideas, versus a popular centrist politician (and trade unionist) who last year won a landslide victory. That should be an interesting battle!

Comments

[Edward Hugh]

Morgan Stanley's Elga Bartsch doesn't seem to have a very optimistic view of the reform outlook either, especially if the outcome was, as it might be, a 'grand coalition'.

http://www.morganstanley.com/GEFdata/digests/20050818-thu.html

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