Snip, Snip, Snip: Kohl's 'Salami Approach' Trims German Budget
But shrinking social programs infuriate unionists
German Chancellor Helmut Kohl has just gotten one austerity program through parliament, and already it's clear that another one is in the works.
He's gotten much, if not all, of what he said he needed last spring when he introduced the program, which is intended to get public finances in shape for the launch of the single European currency in 1999. The program, a modest but not insignificant package of cuts, is also intended to make the economy more flexible and encourage growth.
The financial community is impressed that "the political will is there," as Deutsche Bank economist Rtger Teuscher in Frankfurt puts it, to keep pushing to get Germany's public finances in order.
But the government has quietly abandoned its original, admittedly ambitious, goal of cutting unemployment in half by 2000. Joblessness hit a post 1945 high of more than 10 percent during last winter, and has receded only slightly since.
The trade unionists, who proclaimed a "hot summer" and turned up the heat on the government with nationwide rallies with hundreds of thousands of people, are now speaking of a "hot autumn."
But Mr. Kohl and his coalition government have kept plugging away with their austerity program, known as the Sparpaket.
The coalition government needed to override an upper-house veto and marshaled all of its 341 deputies, including two recuperating from surgery, into the chamber for two roll-call votes for hot-button issues that included:
*Reduction of workers' sick-leave pay from 100 percent to 80 percent of normal earnings.
*Making it simpler to lay people off.
*A phased-in increase in the retirement age for women to 65.
*Elimination of health-insurance coverage for dental fillings for workers born in 1979 or later, and of a 20-mark ($13) allowance for eyeglass frames.
Kohl's program has been hailed as sensible first steps toward a necessary restructuring of the German economy but also blasted as the dismantling of the social safety net.
Paul Horne, an economist for Smith Barney in Paris, calculates that Kohl already has $38 billion of the $46 billion in cuts he was originally trying for. Mr. Horne calls the German efforts "gutsy," especially in contrast with what France is doing to get ready for currency union.
However, not all the changes needed are as simple as cutting a budget item. The statutory change in sick-leave pay, for instance, directly affects only about 20 percent of the work force.
A new round of social-spending cuts, expected by year end, is likely to mean higher individual payments for health insurance, reduction in early retirements, a cut in unemployment benefits, and postponement of an increase in the allowance for children.
Wolfgang Streeck of the Max Planck Institute in Cologne credits Kohl for taking the "salami approach" to slicing away at social programs. The unions will have spent their ammunition fighting the first Sparpaket and will be less effective in a second or third round, he suggests. "Kohl stands a good chance of winning" in these subsequent rounds, he says.
Not everyone is convinced that scrimping one's way into prosperity is most effective. "There's no example in economic history of an employment crisis being overcome by 'tightening the belt,' " comments Herbert Ehrenberg, a former Social Democratic labor minister.
The most recent growth forecasts for Germany are positive - about 1 percent, which is considered good news. But some observers are concerned that for Bonn to be pushing so hard to cut spending is not good for Europe as a whole, especially since neighboring countries are also trying to cut their budgets to meet the so-called Maastricht criteria for currency union: If nobody's buying, then nobody can sell.
Even the bullish Mr. Teuscher at Deutsche Bank concedes, "This is a risk, although a necessary one."