Reforming Germany′s ″Mother of All Reforms″ | Business| Economy and finance news from a German perspective | DW | 31.05.2006
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Reforming Germany's "Mother of All Reforms"

Faced with spiralling social welfare costs, German lawmakers are expected to crack down on system abusers. Conservatives want a complete overhaul of the recently reformed system, but experts don't think that's needed.


There's not much room left to tighten German belts, according to experts

Right now, few things can distract the Germans' attention from the beautiful game as the country gears up for the biggest event since reunification. With only nine days left before the opening match of the soccer World Cup, the whole nation seems to be holding its breath in anticipation.

But on Thursday, many soccer-crazed Germans are bound to pay attention to their parliamentarians. Legislators will vote on a so-called "optimizing law" that's meant to curb abuse of the country's sweeping social welfare and labor market reforms. Introduced by the previous Social Democratic-Green party government in cooperation with current Chancellor Angela Merkel's Christian Democrats in 2004, the Hartz reforms cut payments for the long-term unemployed with the intention of encouraging them to return to work.

Dubbed the "mother of all reforms," the new system did bring down unemployment payments. But the costs of other side benefits, such as housing allowances, rose significantly. As a result, some long-term unemployed now end up getting more money from the state than others who work for their living.

Tweaking the system

Merkel pflanzt Ölbaum

Merkel wants to make sure that those who work get more money than those who don't work

Thursday's amendment to the reforms is aimed at preventing abuse of the system by introducing a set of new checks to make sure people don't claim more help than they actually need. But calling Hartz a failure, several leading Christian Democrats have called for a reform of the reform. Merkel announced on Monday that a "fundamental overhaul" was planned for the fall.

Some economic experts support such a move, saying that overall social welfare payments have to be reduced drastically to entice people to seek work. But while agreeing that abuse of the system cannot be tolerated, others say they don't see a need for a general reform.

"So far I can't really figure out what those politicians who ask for one actually have in mind," said Hans Peter Grüner, a professor for macroeconomics and economic policy at the University of Mannheim.

"There are a couple of more technical shortcomings, but I think one can easily solve these problems with appropriate fine-tuning measures," he said, adding that while the current basic social welfare payment of 345 euros ($443) per month per person seemed adequate, the increase in housing allowance payment had to be examined.

"Certainly it's important to define more strictly what a family actually is," he said. "One should prevent families from splitting up for legal reasons to get more housing allowances."

Confronting people with job offers

Logo Agentur für Arbeit

Light at the end of the tunnel? The logo of Germany's federal labor agency

Ending the current confusion over who should help people find jobs -- municipalities or federal job centers -- would also make the reforms more effective, said Holger Schäfer, a labor market expert at the German Business Institute Cologne (IW), a think tank funded by the country's employers' and business associations.

"We have to decide who is supposed to do it," Schäfer said, adding that the fact that many jobseekers have to wait up to three months to meet with an employment advisor was not acceptable.

"No unemployed person should be left in peace for more than a week," Schäfer said. "They have to be constantly confronted with job offers."

Improved job search assistance is probably something members of Germany's ruling coalition of Christian and Social Democrats can agree on. But the fate of another project aimed to bring more people back to work will likely be fiercely disputed. The so-called Ich AG -- or Me, Inc. -- which offers unemployed people subsidies to start their own business, is backed by Social Democrats. Christian Democrats, on the other hand, want to phase it out.

Litmus test yet to come

"I think this fierce discussion is a bad sign for the coalition," Grüner said about the overall discussion on reforming the labor market reform. He added that both parties faced pressure from their traditional constituencies.

Gesundheitsreform Zahlersatz

Reforming Germany's health care system is bound to be painful

"The Social Democrats are afraid of losing their reputation as the working class' friends, while the CDU is currently in trouble because entrepreneurial organizations accuse Merkel of becoming too soft," he said.

But Hartz isn't bound to become the grand coalition's litmus test; Germany's labor protection laws and the country's health system are much bigger contenders, Grüner said.

"It's quite likely that the coalition will fail and dissolve after a conflict on these issues," he said, adding that the government will probably not tackle them until shortly before the next general election in 2009.

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