Reform Now, Or I'll Quit

Berliners were rubbing their eyes in disbelief. Just ahead of the May 1 Labor Day holiday last week, billboards began popping up at bus stops and subway stations, proclaiming less welfare state means more jobs. Among Germans left and right, such statements were once the ideological equivalent of treason. But the slogan was put up by a public- interest foundation whose trustees include Wolfgang Clement, Germany's powerful new Economics minister. There it was--official policy in black and white.

The world markets don't pay much attention to Berlin billboards, but perhaps they should. With bankruptcy and unemployment rates on track to set new records this year, Chancellor Gerhard Schroder threatened to resign last week if his own Social Democrats failed to adopt his "historic" reforms of a cripplingly generous welfare system. The showdown over what's become known as Agenda 2010 comes at a party conference on June 1, but unions and left-wing party members were out in force for May Day last week, bashing Schroder's plans to trim public-health care, cut unemployment benefits and make it easier for small businesses to hire and fire workers. No one inside Germany or out seems to expect much to happen on reform, even though the country is now headed for its third year of near-zero growth--and for another decade of stagnation. Promises for change zip by like cars on the autobahn, a whoosh of hot air and then they're gone, so why should anyone believe Schroder now?

It's those billboards, one of many signs that the welfare state is no longer politically sacred to most Germans. Economists like Gerhard Fels, head of the German Economics Institute in Cologne, argue that Schroder's plan is too timid: cutting unemployment benefits from 18 months to 12 isn't enough of an incentive for workers to look for jobs, and the proposals only make it easier for a small fraction of German companies to fire deadwood employees. Since the chancellor's plan was unveiled last month, the closely watched IFO index of business confidence has dropped 2.4 percent, and normally circumspect CEOs have been voicing their outrage. Last week Infineon chief Ulrich Schumacher threatened to move the chipmaker--Europe's second largest--from Munich to Switzerland while fuming over failed reforms. That German payroll taxes are now twice what his foreign competitors pay is "totally unacceptable," Schumacher groused.

Even Germans who voted for Schroder are getting tired of his promises to make history by cutting back the nanny state. His "historic" income-tax cut of 2001 has been more than eaten up by dozens of other tax hikes since. A "historic" pension reform in 2002 was even more of a dud, producing a bureaucratic new system of private mini-pensions that few Germans have taken up. And his "historic" promise to trim the labor bureaucracy, which employs more than 90,000 people to find work for only a few hundred thousand jobless each year, was watered down to appease the bureaucrats. Ask ordinary Germans what they have to show for five years of Schroder's reforms, and they'll say a thinner wallet and an annoying new 25-cent deposit on beer cans.

And yet, all this gives Schroder new leverage to press reform on the one German constituency that still hates the idea: his own labor support, including union members who occupy 80 percent of his party's --seats in the Bundestag. Those Berlin billboards, unthinkable a year ago, are now possible because most Germans recognize that free-market reforms are unavoidable. According to a poll published last week by the NEWSWEEKly Stern, 90 percent of Germans are in favor of extensive reforms, with 68 percent saying the need is "urgent." The mainstream media are also abandoning their old role as shrill defender of the welfare state. Today's system is defined by "bureaucracy, over regulation and too few incentives to work," Stern editor Andreas Petzold wrote in a cover story last week on the growing exodus of Germans seeking their fortune abroad.

The new attitude has put labor unions, long the bulwark against change, on the defensive. Already, union membership has dropped from 11.8 million in 1991 to 7.7 million last year, while thousands of companies have quietly abandoned collective-bargaining agreements and begun setting their own wages. Fifty percent of Germans now say union power should be curbed, versus only 26 percent who think their influence should rise, according to the Infratest polling institute. Those numbers were the exact reverse four years ago. The two biggest unions--representing metalworkers and service personnel--probably accelerated their own demise by recently electing firebrand leaders. Last week new IG Metall union chief Jurgen Peters likened the pro-reform camp to Weimar-era politicians who helped bring Hitler to power--and called for massive government make-work programs financed by taxes on business and "the rich." German commentators ridiculed his "outdated" eruption.

Then there are those pesky Greens, the coalition partner on whose support Schroder's rule depends. Believe it or not, the former tree-hugging radicals have morphed into pro-market reformers. Young Germans who like to vote Green know they'll lose most if reform isn't tackled, and so Greens like Katrin Goring-Eckardt are pressing Schroder to kick it up a gear. "We need deep reforms [and not] minor repairs," the Greens' floor leader told the Bundestag last month. Not only have the Greens warned Schroder not to cave in on Agenda 2010, they're also pushing plans for a radical overhaul that goes far beyond the present round of reforms.

Schroder has fallen way behind the popular will on reform, a fact that is on dramatic display in Berlin. There, the near-bankrupt city government has done the impossible in the past 15 months: slash runaway spending, terminate expensive union contracts and start to clear out some of the city's most inane regulations, from the law that tells bakeries when they can open to the rule that prohibits people from setting up a business in a residential apartment. The mayor, Social Democrat Klaus Wowereit, has never been more popular. Economics Minister Harald Wolf, one of a growing faction of can-do communists, is leading the deregulation drive.