A farewell to Germany's welfare state?

Would Gerhard Schroeder be able to deliver? Would he turn his back on the left-wingers in his Social Democratic Party and the over-blown trade union bureaucracy, and embark on a badly needed reform programme?

The engine of Europe's biggest economy is spluttering. The latest figures put the total unemployment at 4.7 million, economic growth has almost come to a standstill and the German welfare state is staggering under the ever-increasing burden of inflated claims. With a burgeoning public debt, Mr. Schroeder's government has now suffered the humiliation of exceeding the limit of the Euro Stability Pact, which was initially formed on the insistence of the Chancellor's predecessor.

As could be expected, the reaction to the 'landmark' speech is a very mixed one. 'The grand design it is certainly not,' sneered the leader of the opposition, Mrs. Angela Merkel (Christian Democrats), who is dubbed by many as the up-and-coming Lady Thatcher of Germany.

Mrs. Merkel certainly has a point. However, the Chancellor unveiled social, economic and labour market changes that went further than most economists expected. As well as deeper cuts into employment benefits, he also demanded greater scope for employers to opt out of rigid industry-wide collective bargaining structures and make it easier for small companies to hire and fire people.

Germany's health system, plagued by rising costs and falling standards, would have to be thoroughly overhauled, and the same goes for the state pension scheme, which is becoming untenable with Germany's population ageing and life expectancy growing.

Mr. Schroeder surpassed the expectations of business leaders by slashing the terms of benefits for the unemployed. Depending on age and status, recipients will be able to receive benefits for no more than 12-18 months - down from a maximum 32 months today (which is still generous as compared to the UK and the USA).

'Either we modernise or we will be modernised by the unrelenting forces of the markets,' was Herr Schroeder's clear message.

The Chairman of Siemens AG, Heinrich von Pierer, urged the Government to implement the Schroeder programme without delay. Trade union leaders, on the other hand, have reacted with the predictable howling and gnashing of teeth, declaring stiff resistance to any 'tinkering with the welfare system'. The coming weeks will show if Schroeder and his supporters have sufficient clout to break with the comfy past and bring Germany's economy back on course. It will probably be the last chance for this government.