German business is hungry for change

Jürgen Thumann, The BDI President, however, did not mince his words: 'A victory for the opposition Christian Democrats of Ms. Angela Merkel in the forthcoming general elections would be good news for German companies, while another term for Chancellor Schroeder's Social Democrats could only spell gloom and doom'.

German business leaders, once charmed by Herr Schroeder, the man whom left-wingers in his own deeply split party derided as 'the comrade of the bosses', are hungry for change.

In a recent survey of 22,000 firms conducted by the umbrella organisation of the German chambers of trade & industry DIHK, 58 per cent said they believed the overall business situation would improve after the poll.

Germany's leading stock market index, the DAX, has soared at the prospect of a regime change in Berlin and, for the first time since May 2002 climbed briefly over the 5,000 mark on 07 September, inspired by gains of Commerzbank AG.

Most of the big banks expect the trend to continue. In the words of Rolf Schneider, chief economist of Dresdner Bank AG, this confidence is based on the hope that a new government will chart a clear course of reform, which Europe's leading economy so badly needs.

With 5 million unemployed, sluggish economic growth and teetering public finances, Germany is a far cry from the days when it used to be Europe's economic powerhouse.

The CDU, which wants to form a coalition government with the rather small, but strictly pro-reform Free Democrats, has pledged to pursue a radical overhaul and even some dismantling of the welfare state, which is a legacy of Germany's post-war reconstruction and the economic miracle of decades ago.

First and foremost, Ms. Merkel will have to make the labour market more 'flexible', i.e. cut the power of the trade unions and loosen Germany's tight protection of employees' jobs, which makes companies very reluctant to take on new labour even when demand is increasing. Some of the cornerstones of the envisaged economic reforms are:

- Taxation: Close tax loopholes; reintroduce capital gains tax on sales of corporate cross-shareholding; cut headline corporate tax to 22 per cent in 2007;
- Labour Market: Raise VAT from 16 per cent to 18 per cent, using added income to cut costs to employers of social security contributions, thus helping to create more jobs;
- Domestic demand: Relax banking rules that make it hard for small businesses to get loans;
- Welfare: A flat healthcare contribution regardless of wage, Pay-as-you-go nursing insurance; encourage private occupational pension schemes.

Needless to say, this policy is not necessarily popular with all strata of the electorate, and the eloquent Chancellor Schroeder, often described as 'the Chancellor of the Media', has fought back tooth and nail the closer the date of the poll looms.

An opinion survey published on 7th September indicated for the first time since the early election was announced in May, the CDU and its ally, the Free Democratic Party, failing to win a majority on 18 September.

The chances are now that Ms. Merkel will become German Chancellor, but will be forced to rule in a 'Grand Coalition' with Gerhard Schroeder's dysfunctional Social Democratic Party as a junior partner. This would not exactly spell 'gloom and doom', but it is difficult to imagine that it would mark the big turn-around for Germany.