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Business

EU Proposal Could Hinder German Labor Reforms

European Competition Commissioner Mario Monti's plan to cap government wage subsidies in member countries could throw a wrench in Chancellor Gerhard Schröder's plan to reduce unemployment rolls in Germany.

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Mario Monti says wage subsidies make European markets less competitive.

In a move that could severly limit the scope of labor market reforms planned by Chancellor Gerhard Schröder's new government, EU Competition Commissioner Mario Monti is set to introduce a new regulation limiting the amount by which European governments can subsidize wages.

On Monday, the German newspaper "Handelsblatt" reported that Monti was planning to present the new rules for a vote at the next meeting of the European Commission on Oct. 30.

The regulation would limit to 50 percent the amount European governments can subsidize wages in job promotion programs. Currently, Germany subsidizes as much as 80 percent of the wages for the severely disabled, long-term unemployed and other jobless who are difficult to reintegrate into the job market.

Commission sources told the newspaper that Monti believes subsidies in excess of 50 percent damage competition. Monti had initially called for a 40-percent cap but then eased the figure to 50 percent, "Handelsblatt" reported.

Germany and France unhappy with plan

Monti's plan is being met with considerable resistance from the German and French governments. Germany has demanded an 80-percent ceiling on the subsidies, saying it needs the extra wiggle room in order to implement the proposals of the Hartz Commission.

Led by Volkswagen board member Peter Hartz, the commission issued recommendations in September for revitalizing Germany's beleaguered labor market, which is plagued by a stagnant economy and high unemployment of close to four million. A key provision of the Hartz Plan calls for an increase in the government subsidies allocated for so-called "mini-jobs" that make hiring long-term jobless more attractive for employers.

"A difficult balancing act"

If the regulation, drafted by Monti and EU Social Affairs Commissioner Anna Diamantopoulou, is approved by the Commission, it would mark the first time Brussels has sought to draft policy on wage subsidies. The regulation would go into immediate effect if approved by a majority of the Commission's 20 members and would not require approval by the European Council or the European Parliament.

In an internal memo obtained by "Handelsblatt," Diamantopoulou acknowledged that the ruling could also dampen the EU's own ambitious goals for reducing unemployment. But the regulation is needed as part of the "difficult balancing act" between active labor market policies on the one hand and a fair competition on the other, she wrote.

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