Deadlock in Germany

Think of it as the ten per cent German election. Unemployment over ten per cent led Social Democrat Chancellor Gerhard Schroeder [1] to call the election a year early, looking for a mandate to push labour market reforms.

The second rank parties, the Greens, Free Democrats, and Left Party got nearly ten per cent each. And the challenger Angela Merkel [2], and her conservative Christian Democrats (CDU) lost nearly ten percentage points in public opinion in the last week of the campaign, leaving the CDU deadlocked with the ruling Social Democrats. Both parties won about 35 per cent of the vote and finished with nearly the same number of seats.

Schroeder remains Chancellor, but sometime before October 16 a working coalition of parties must be established under either a CDU or Social Democrat Chancellor.

Merkel, a native of the former East Germany, wants radical labour market reform. Give small business the ability to lay off workers more easily and beat unemployment she argues. You have to be a market economist to get that one. Fire people and reduce unemployment? Should not that read — hire people?

The CDU, and to a lesser extent Schroeder, want more flexibility from labour. This is code for less money in salaries and social benefits.

Unemployment costs are high. But there are two dimensions to unemployment costs. Direct costs are what it costs to pay unemployment benefits. Much more important are the costs to society from lost output. With over ten per cent of the workforce on the sidelines the economy does not grow.

The Christian Democrats have bought into one standard solution to unemployment: blame the unemployed. You see they have too much money. And employers need incentives so they can hire more workers. So lower the direct benefits to the unemployed. This allows wages to adjust downward as the unemployed worker is more desperate to take work, and at lower wages the employer is then encouraged to hire more workers.

The only problem with this solution is that it does not work. People who lose their jobs, workers who have lower unemployment benefits, and those who see salaries shrink, do not go out and spend. Without spending increases business does not invest, and unemployment goes up.

Make things worse for people and they get worse.

This election saw the emergence of the Left Party [3], a coalition formed out of the onetime ruling party of the old East Germany, the communists, and dissident Social Democrats, led by Oscar Lafontaine, briefly Finance Minister, unhappy with Chancellor Schroeder. This new grouping will not be invited into the Social Democrat alliance with the Greens, though that would be an obvious way to establish a ruling coalition. The mutual antipathy between the Left Party and the Social Democrats is too strong.

When the CDU came out for a flat income tax to replace the progressive, the more you earn, the more you pay, system, it began to plummet in public opinion polls. Angela Merkel misread the mood of the public. Germans saw no need to give tax “relief” to the rich.

Schroeder has to answer for high unemployment, and his policy proposals look like a milder version of what is being offered by his conservative opponents.

The better course for Schroeder would be to work with the unemployed at finding solutions to unemployment. Instead of treating workers like commodities, lowering the price of labour so that more workers can be hired, he and his party should be finding ways to treat the unemployed as citizens with concerns about their future and their families. What do they see government doing, what can the unemployed add to the debate over the future of Germany and Europe?

Failure to address 10 per cent unemployment cost the governing Social Democrat-Green coalition a victory. While the Greens might be enticed into a coalition with the CDU and the pro-business Free Democrats, a grand coalition between the CDU and the Social Democrats is also being discussed.

The unemployment problem is centred in the former East Germany, where the Left Party is strongest. Whatever the outcome of the parliamentary maneuvering, the way ahead for the Social Democrats is through policies that will work in the East. Building bridges to the former communists is part of the Social Democratic way out of the deadlock in Germany.

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