It’s the Labor Market, Stupid

A host of economists and international financial organizations introduced their economic predictions this week – and the news for Germany continued to look grim.

As their euro-zone neighbors slated to recover from the recent economic downturn, with Finland and Sweden particularly strong, the world’s third-largest economy remains firmly in last place in the European Union for at least the rest of the year.

The most recent study, by the Organization for Economic Co-Operation and Development, predicted just 0.7 percent growth for Germany and 1.3 percent growth in the Euro-zone overall.

A heavy budget deficit and a decrease in exports are the temporary problems. An out-dated labor market and government spending are the long-term ones.

The labor market was cited by the heads of Germany’s most important economic institutes as the main culprit in Germany’s sluggish growth on Monday. On Wednesday, the European Commission followed with the same verdict.

But don’t look for things to change anytime soon. Two months after Germany’s new job czar Florian Gerster (photo) came into office with a fresh list for trimming down the state’s generous welfare system and plans to get more people into the work force, things have not budged.

Germany’s labor unions were heavily against Florian Gerster’s proposals. Business leaders said he didn’t go far enough. Chancellor Gerhard Schröder, dependent on union support in this election year, has shied away from the sort of radical reform Brussels would like to see and Gerster advocated.

Now economists fear labor’s might could add to Schröder’s economic woes. Planned strikes by Germany’s metal and electrical workers, who represent the growing sector of the German economy, could dampen their growth forecasts, they said in their Monday predictions.

The high costs of the labor market have a direct bearing on Germany’s budget deficit, which now lies at 2.8 percent, according to the European Commission report released Wednesday. The statistic makes Germany, once again, last in the European Union and leaves it dangerously close to the 3 percent limit over which member states absolutely cannot cross.

Just one month ago, Germany was faced with the prospect of a humiliating "blue letter" of warning from Brussels regarding its deficit. The country avoided it after political wrangling by Schröder that upset many in Brussels.

The chances he will be able to pull off the same are slim. Economists, and many in Germany’s business elite, would prefer he go about the budget deficit more practically.

But in the midst of a tight election race, Schröder’s government has appeared paralyzed. The thinking seems to be that reform is best done when a victory is in sight.