One Year of the Grand Coalition in Germany
By Dr. Norbert Walter

Almost everything there is to say about the first year of the grand coalition has already been said by almost everyone.  Many people thought Germany would probably witness an era of swift and comprehensive reforms being passed by overwhelming majorities in the Bundestag and Bundesrat, but their hopes have been dashed.  Those who heard my pre-election analysis know that I did not share such hopes.  On the contrary, I was afraid that the results would be a grand coalition between protectors of the status quo.  I have been impressed by the committed efforts of leading CDU and SPD politicians to make a success of Germany's second attempt at a grand coalition.  The coalition agreement certainly served up a program with chutzpah to boost the cyclical recovery.  And it's working, as we can see.  Growth is picking up and more jobs are being created.  The resolve to rein in the debt leviathan is something we should all salute.  However, the fact that the primary focus in doing so is not public expenditure, but instead a huge tax hike, is more than a cosmetic error.

I find two things fascinating following year one of the grand coalition: first of all, the confirmation that not a single one of all the major and important reforms has been comprehensively addressed and set in motion.  Secondly - and this is the bewildering aspect - the government appears unlikely to devise any new initiatives.  Even worse, there is no indication that another early election could deliver a different governmental make-up.  All that could be expected would be even more stay-at-home voters and protest voters choosing extremist parties.  We would simply get this grand coalition again, but this time comprising fewer MPs in each party's parliamentary ranks.  This realization means that the current government is likely to remain in office until the end of the legislative period, but mired in political deadlock. 

Take healthcare reform, for instance.  In reality the only thing that those involved agree upon is that they have to come up with something in order to save face.  There is an agreement about the key components of the reform package, but mostly disagreement about their interpretation.  All the signs are that a CDU/CSU/SPD compromise will spawn a bureaucratic monster which, apart from providing a few marginal improvements, will result in more collectivism, a more bloated state and the permanent shackling of a sector that urgently needs to be freed from paternalism and to embrace more competition.  In this respect, by the way, it is not only the social affairs functionaries of all the mainstream political parties, the unions and the churches who are doing the stonewalling.  The private health insurers are also against the competition option with regard to the important issue of the portability of their policyholders' accrued benefits.  The healthcare reform that currently appears politically achievable is one that Germany doesn't need.

And then there is the reform of corporate taxation.  On this topic, too, nearly everything there is to say has already been said by everyone.  Making Germany an attractive location via more competitive tax regulations is rightly a priority objective.  However, what is causing an uproar, and rightly so, is that firstly the relief is to be very strictly limited -- in reality the worsening of the depreciation regulations means that merely the additional expenses will be offset - and secondly the way that the tax regime is to be modified to achieve this objective: the only thing that can be said for sure is that there will be more work for the tax authorities and tax advisors.  The principles of taxation are being trampled all over.  Everything is becoming more complicated.  The definitive tax on investment income has been shelved.  The rates being discussed in Berlin have raised loud guffaws in Kleinwalsertal and other neighboring banking locations.  Those passing tax laws in Berlin should thus be aware that such tax plans are not going to result in the repatriation of any foreign-held capital.  We need a simple tax system with competitive investment and corporate taxes:  to do this we need -- at the very least -- to humbly revisit the tax plans devised by the much-maligned "Professor from Heidelberg," Paul Kirchhof.  Adopting a less bold approach is doomed to failure.  But that's what seems likely to happen at present. 

Then let's not forget the "combi-wage."  Yes, we do need better incentives and opportunities in the German low-wage sector.  The current system of transfers is not a reliable instrument for reintroducing jobseekers into full-time employment in the official economy.  This objective is unattainable without further reductions in benefits and without more effective sanctions against those who refuse job offers, especially having to take into account that public-sector funding is no longer available.  That is why the financial incentives have to be reworked - not geared towards "mini-jobs" or part-time jobs, but jobs for which social security contributions are obligatory.  What should also be remembered is that the introduction of minimum wages would be particularly disastrous for the employment opportunities of the less skilled and the unemployed.  Those who embellish "combi-wage" models with minimum wages may deserve praise because they are attempting to relieve the public purse, but their actions will not reduce unemployment.

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Professor Dr. Norbert Walter is Chief Economist of Deutsche Bank Group and a frequent participant in AICGS events.

This essay appeared in the November 10, 2006, AICGS Advisor, and originally appeared in German in the October 1, 2006, Welt am Sonntag. Please click here to read the original version.