German jobless rate falls below 10% (FT)

A steep drop in unemployment last month brought Germany’s jobless rate below the psychologically significant 10 per cent mark for the first time in four years, drawing triumphant reactions from the otherwise conflict-ridden government of Angela Merkel, chancellor.
The surprisingly good figures released on Thursday by the Federal Labour Agency came as Ms Merkel was preparing to host a “public-finance summit” on Friday with leaders of her grand coalition to discuss how to allocate the tax windfall generated by the robust economic rebound.
The number of jobseekers stood at 4.09m last month, or 9.8 per cent, the lowest rate since November 2002, putting the monthly fall at a hefty 67,000 – three times higher than economists expected. “Not even chronic nitpickers and killjoys can ignore the facts now: the breakthrough on the job market is here. Let us rejoice,” said Franz Müntefering, labour minister.
The figures provided a positive backdrop to Friday’s meeting, at which Ms Merkel hopes to bring order to the cacophony of demands triggered by higher-than-expected tax revenues. A circle of economic forecasters that regularly reviews the public finances is on Friday expected to forecast this year’s revenues at about €485bn ($605bn, £327bn), €20bn above its May estimate.
But the positive data also highlighted the contrast between the robust health displayed by Germany’s economy and the image offered by its divided government, which has struggled to pursue reforms.
Ms Merkel has hinted she favours using the extra tax revenue to cut social security contributions, the payroll levies that make German workers among the most expensive in the world. But her Social Democrat coalition partners would rather cut the federal deficit.
In a surprising contribution to the debate, Ms Merkel’s Christian Democratic Union (CDU) has said it will adopt a motion at its congress this month calling for higher jobless benefits, turning the tables on the left-of-centre SPD, which has reacted with accusations of populism.
In addition to booming tax revenues, Germany is experiencing a robust inflow of money into its social security system. After Thursday’s good unemployment figures, the Labour Agency is on course to generate a €11bn profit this year.
Employment statistics, which lag one month behind the unemployment figures, showed a 24,000 increase in September, bringing the number of jobs created this year to 281,000.
Given the scale of the job recovery, economists are puzzling over why private consumption, for years a particularly weak spot of the German economy, is stubbornly refusing to rebound.
Deutsche Bank argued that the cause lay in tough anti-dismissal laws, which led to 70 per cent of all jobs created this year going to people hired through temporary work agencies who typically earn – and spend – less.
■ The rival parties in Germany’s coalition on Thursday said they had reached an agreement on a modified version of their draft corporate tax reform.
The deal provides for an average nominal tax rate of just under 30 per cent, against 38.6 per cent today, and includes a new, 25 per cent withholding tax on capital gains.
Although the reform would lift the tax burden on German companies by €5bn in the first year, Peer Steinbrück, finance minister, said the goal was to maximise tax revenue in the longer term by making Germany more attractive for investors and discouraging tax avoidance.
The most controversial part of the original plan – a tax on interest payments intended to extend the tax base by closing a loophole in the current legislation – was modified. Under the new model, the amount of interest payments that can be deducted from taxable profits will be determined by the size of these profits. There are still a number of hurdles to be passed before the reform comes into force in 2008.
Copyright The Financial Times Limited 2006