The Hindu Business Line : Welfare cuts - a testing time for Germany's Schroeder

GERMANY, the world's third largest economy - after the US and Japan and "locomotive" economy of Europe, is currently passing through a phase of deep uncertainty with high unemployment (over 10 per cent) and low economic growth - less than a per cent or perhaps negative by end 2004.

Hence, Germany is currently at an unprecedented political, social and psychological crossroads, as the centre-left coalition Government of Chancellor, Mr Gerhard Schroeder, is attempting to trim welfare, social security and pension costs - highest in the world.

The country's bold efforts to reduce workers' benefits (more than half of real wages) to stimulate Europe's largest economy (less than $2 trillion) are today being tested and challenged by some of the biggest street demonstrations in major German cities since the fall of the Berlin Wall and collapse of communist rule in east Germany in 1989 or 15 years ago. This week's protests were so intensive that some of them have been named after a series of protests that led to the fall of Berlin Wall 15 years ago and obviously there is eerie nervousness in the German establishment that such protests do not culminate or translate into violence.

With the proposed end of Europe's costliest welfare state, psychological trauma of an average German worker is understandable. It is also so obvious to all concerned that a quiet social revolution is under way.

Mr Schroeder is seen on walking edge with growing challenge to his leadership from the left wing of the centre-left coalition alliance of Social Democrats and The Greens or Environmentalists, who have a majority in the German Lower Parliament but in the Upper Parliament, the opposition Christian Democrats have a majority.

In fact, Mr Schroeder's most enthusiastic supporters are the centre-right Christian Democrats in Berlin and 16 state governments.

The issue of German welfare benefits, today is highly emotive and divisive in the German society and there is much uncertainty about political future of Mr Schroeder with coming general elections in 2006.

The uncertainty has been highlighted by the ruling centre-left alliance's " miserably poor " performance in recent elections for state officials and the German parliamentarians for the European Parliament.

Independent analysts feel that proposed legislation to trim the German welfare state does not go far enough and there are question marks if such a timid reform process will boost the depressed German economy.

"Progress in structural reforms in German remains painfully slow, bogged down by plunging approval ratings and a widening rift between the governing social Democrats and (German) trade unions," Morgan Stanley economists wrote this week.

The German trade unions are seen losing their influence. The membership is down from 11.8 million in 1991 to current level of just 7.4 million.

Apart from high wage and welfare costs for skilled workers, mainly paid for by the employers, the Germans have the world's shortest "work weeks" now averaging 35.7 hours a week compared with 40 hours a week in the US and 43 in Japan.

The strategy of "short working week" was devised to boost employment but with current unemployment hovering round 10.6 per cent mark of German working population Germany's job pool is fast shrinking.

The crises are further compounded by the quiet demographic revolution of falling birth rates and average Germans living longer.

By 2020, according to current estimates, if present trend continues, Germany may have more pensioners than taxpayers, unless the authorities can offset the crises by bringing in skilled immigrants from poorer countries.

The Christian Democrats in German Opposition on Tuesday called for a meeting with all major political parties to discuss the issue of trimming welfare costs to boost economy.

But, the task of overhauling an economy that lags behind the US, Japan and major European economies, in workers productivity and growth looks both daunting and challenging.