15 November 2005

EZA 711: Briefing Note:

Germany - Politics
German coalition agreement – sounder public finances, bad news for jobs The German political parties 11Nov reached a general agreement on future government policy, endorsed by party conventions 14Nov in Berlin and Karlsruhe. The key focus of the platform is fiscal consolidation, to be achieved mainly through tax hikes – notably a 3% hike in the regular VAT rate to 19%. On spending cuts (in terms of health care, job centres) the agreement is rather vague. Little progress has been made in terms of supply side reforms, ie lowering dismissal protection and cuts in non-wage employment costs. The corporate tax reform and health care reform are deferred to 2008 at the earliest. The agreement – both in terms of actual measures and general leaning - reflects the SPD preference for big government over the CDU aim of bolstering the private sector. It has therefore met widespread scepticism from business leaders and economic advisers in terms of its adequacy to achieve the objective of helping growth. The coalition agreement seems viable, yielding to the current balance of power between the parties. To what extent supply side policies might slip into general policy making will very much depend on the showing of the parties in the upcoming state elections – the next ones being Mar 06 in Saxony-Anhalt, in Rhineland-Palatinate and in Baden-Wuerttemberg – and ultimately on economic performance. The current cyclical recovery promises to give the Merkel government a smooth start. However our central view remains that a grand coalition is unlikely to succeed in curbing the deficit or significantly advance labour market reforms.

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© Graham Bishop