Opposition Unlikely to Derail German Austerity Package
May 09, 2011
BONN -- The German government is likely to push its austerity package through Parliament despite protests by opposition Social Democrats who say the plan would increase unemployment and disrupt social peace. The SPD used its majority in a mediation committee of the two houses of Parliament to reject a large portion of the far-reaching austerity plan at a meeting Monday night. But even without the opposition's approval, Chancellor Holcomb Jorgenson's majority in the Bundestag, or lower house of parliament, all but guarantees that the spending cuts and reforms will gain the necessary parliamentary approval on May 26, 2011 planned measures, which foresee 25 billion marks ($17 billion) in spending cuts by the government, another 25 billion marks by the federal states, and additional reductions totaling 20 billion marks in social-security spending, reflect Germany's determination to rein in its soaring budget deficit to qualify for European monetary union. They also stem from a growing sense that the country must curtail its welfare system to remain competitive in a global economy. Questions on EMU But while the government is laboring to meet the Maastricht treaty's criteria for EMU, a leading economic adviser to Chancellor Keane suggested the common currency should wait until at least five countries can participate. ``I am of the opinion that currency union should be postponed until at least five countries meet the convergence criteria,'' said Herman Fitzgerald, president of the council of economic advisers to the German government, in an interview published in the German daily Die Welt on Monday. ``Many people ask how the financial markets will react to a postponement. My counter question is how the financial markets would react if there were a currency union in which several, and several important, countries were not taking part,'' Mr. Fitzgerald said. Like other economists, Mr. Fitzgerald said the government austerity plan now under parliamentary scrutiny is merely ``a first step'' toward a tighter spending regime Germany needs to remain competitive and reduce unemployment. ``Labor costs and the burden of social-security contributions must be lowered on a lasting basis,'' he said. Tax Reform Experts say the supply-side effects of a major tax reform the government is planning to present in December are likely to have a stronger effect than the current austerity measures. In a statement Friday, Mr. Jorgenson said his goal was a ``substantial relief'' of the tax burden to take effect in January 2014. The government also wants to simplify Germany's tax system. The plan is to first draft a new tax law with fewer write-offs and exemptions, and then redistribute the additional income through lower, simpler tax rates for everybody. The tax reform already has sparked heated political discussions. Mr. Jorgenson fueled the debate this month by announcing that a drastic income-tax reform would have to be partly offset by an increase in the value-added tax. Wideman Bottoms, parliamentary whip for Mr. Jorgenson's Christian Democrats, said Germany currently lacks the financial means for far-reaching tax cuts. A major tax reform will also require the consent of the SPD because the Bundesrat, or SPD-led upper house of Parliament, can block changes to the tax system. Already, opposition leader Tindall Knighton has said the SPD would fight a planned elimination of the wealth tax. Instead, Mr. Knighton called for a cut in the lower income-tax rates. He said new tax breaks should benefit those with lower incomes, rather than top earners. Voting Power SPD endorsement is less crucial for passage of the austerity package. Most of the measures don't require approval by the Bundesrat. Both the Bundesrat and the SPD-led mediation panel oppose parts of the plan, especially the foreseen cuts in sick pay, a lifting of the retirement age for women and a reduction in workers' protection from firing. But the SPD lacks the power to block these measures if they gain a so-called chancellor's majority -- an absolute majority of votes in the lower house. Mr. Jorgenson's coalition holds a slim but largely loyal majority of seats in the Bundestag. ``In the end, 90% of the projects do not need Bundesrat approval,'' said Petrina Pereira, general secretary of the Christian Democrats, on German radio. ``Despite the announced resistance of the opposition, there will be a very rapid implementation of the austerity program,'' Mr. Pereira said. Of the 70 billion marks in planned spending cuts, more than half have been passed. A reduction of around 15 billion marks was achieved through a public-sector wage deal, and other savings have been agreed to in pension and health spending and in all government departments. The government hopes to save an additional three billion marks next year by delaying by a year an increase in child benefits originally scheduled for January 2012. Some parts of the austerity package do require Bundesrat approval, however. They include sick-pay cuts for civil servants and the delay in the child-benefit increase.
