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Germany

Chancellor Compromises to Push Reforms Past Final Hurdle

Chancellor Gerhard Schröder lost several battles but ultimately won the war to push ahead landmark welfare reforms and a tax cut aimed at boosting Germany’s struggling economy.

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"An absolutely respectable result" - German Chancellor Schröder, left, with Foreign Minister Fischer.

Following three days of marathon negotiations, government and opposition politicians reached an agreement early Monday morning on a reform agenda that will take the first steps towards dismantling Germany’s welfare state.

Schröder had to make several compromises with politicians from the opposition Christian Democrat and Christian Social Union, but emerged pleased with the result.

“It is really an absolutely respectable result that we can accept and that in current conditions can bring our country further,” Schröder said.

The agreement in the mediation committee of Germany’s upper house of parliament ensures passage in both houses of parliament. Parliamentarians will have to vote on it in the coming week for it to become law on Jan.1, 2004.

Smaller tax cuts lessen Germany's growth chances

The biggest area of compromise was in a planned €15.6 billion ($19 billion) tax cut for 2004 that Schröder’s Social Democratic-Green coalition government pushed forth in order to boost Germany’s slow-growth economy. Opposition politicians, against a severe tax cut because it would increase borrowing, bargained Schröder down to €7.8 billion.

Analysts say the lower cut will also lower the 0.2 or 0.3 percent increase in Germany’s growth rate anticipated with the cuts.

The Christian Democratic Union and Christian Social Union also pushed the government into encouraging legislation that will loosen hire and fire laws in Germany, a major stumbling block for foreign investors. Opposition politicians were however unable to wrench Schröder from the system of industry-wide collective bargaining, a bedrock of union power in the country and politically important for Schröder’s Social Democratic Party.

All in all, a good deal long-term

“We showed … that it’s possible to come to a acceptable and worthwhile compromise despite the difficulties and different positions,” said Edmund Stoiber, head of the CSU. “I think it’s a good day for politics in Germany.”

Economists said the compromise would lessen Germany’s chances of serious growth in the coming year, but greeted the loosening of employee dismissal laws.

“The tax cuts will have practically no effect on the economy, except for maybe a small psychological effect,” Lothar Hessler, of HSBC Trinkhaus & Burkhardt, told Reuters. “The labor market reforms, however, go in the right direction and should improve Germany’s long-term growth possibilities.”

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