Germany’s powerful trade unions proposed a massive borrowing and investment program to spur growth and cut unemployment on Thursday. But the plan was immediately rejected by both the government and economic experts.
Union boss Michael Sommer and Chancellor Gerhard Schröder don't agree on proposed reforms.
Angered by the government’s proposed “Agenda 2010” package of economic reforms, the German Trade Union Federation (DGB) suggested investing €15 billion ($17 billion) to cure the nation’s ills.
At the core of the union plan are tax cuts and public spending to stimulate domestic demand, largely financed by increased government borrowing. DGB Chairman Michael Sommer said the union plan was an alternative to painful economic reforms proposed by German Chancellor Gerhard Schröder.
The government’s Agenda 2010 calls for deep cuts in the welfare system and the loosening of Germany’s strict job protection rules, which has led to heavy criticism from both the unions and left-wing members of Schröder’s Social Democratic (SPD) party.
“We don’t assume that cuts in social programs will stimulate the labor market,” said Sommer at a press conference to present the DGB plan. “Germany finally needs solid policies for growth and employment.”
Schröder’s refusal to alter from his reform course has opened up a nasty rift between the SPD and the unions, a traditional constituency of the party. Schröder and Sommer cancelled a meeting on Tuesday after talks between the government and unions on the reforms made no headway.
Unions seen as opposed to reform
Germany’s unions have come up with their own proposals to help counter the public perception that they are simply blocking desperately needed reforms. In recent years, Europe’s largest economy has ground to a halt under the weight of its generous welfare system and constricting labor market policies. Economic growth slowed to only 0.2 percent in 2002, its lowest annual rate since a recession in 1993, and German unemployment is running at almost 11 percent.
The DGB said its plan of massive public spending would help jumpstart Europe’s largest economy and could lead to growth of 1.0 to 1.5 percent growth, but the proposals were immediately dismissed by the government, economists and the German business community as being highly unrealistic.
“They aren’t suggestions that particularly help the reforms at issue,” said SPD General Secretary Olaf Scholz on Thursday. “Their effect would be extremely questionable.”
Budget deficit problem
In particular, the DGB proposal to increase federal borrowing by €7.5 billion is likely a non-starter for the government. Germany is required by European Union rules to keep its budget deficit under three percent of its gross domestic product or face sanctions. Taking on the debt that the unions propose would likely present more trouble with Brussels than Berlin would be willing to risk.
“I think there were a lot of proposals that at the end of the day simply could never be financed,” Thomas Straubhaar, the president of the Hamburg-based HWWA economic institute, told NDR radio.
Schröder stuck to his reform course at a regional SPD congress in Hamburg on Wednesday evening. The government has organized four regional meetings to make its case for the reforms ahead of a special national SPD congress on June 1. “If we don’t shape this process, than it will be shaped without us and people will be worse off,” said Schröder. “We have to marshal the necessary strength for it.”