Merkel retreats on labour market reforms (FT)

Chancellor Angela Merkel’s Christian Democratic Union on Monday endorsed a proposal to increase unemployment benefits for older jobseekers, offering the most graphic illustration yet of a swing of the political pendulum away from structural reforms in Germany.

The proposal to link jobseekers’ benefits to the amount they contributed to the insurance scheme before losing their jobs is a U-turn from the unpopular labour market and social security reforms launched by Gerhard Schröder, Ms Merkel’s predecessor, in 2003.

“The pendulum is swinging again towards a stronger state, a bigger state,” Elga Bartsch, economist at Morgan Stanley, said. “We are heading for a more populistic, more protectionist electoral campaign in 2009.”

Although the CDU’s initiative is unlikely to become government policy, it will raise doubts among business and economists about the ability of Ms Merkel’s left-right coalition to reform Germany’s over-regulated labour market and its welfare state.

Most economists think the government should take advantage of the economic recovery and increased jobs to push through reforms.

The proposal, endorsed yesterday by the CDU Präsidium, its top decision-making body chaired by Ms Merkel, underlines the party’s growing misgivings about the pro-reform, business-friendly electoral platform many CDU officials think was responsible for Ms Merkel’s modest showing at last year’s election.

Tabled by Jürgen Rüttgers, the left-leaning CDU state premier of North Rhine-Westphalia, the motion will come before the party’s November 27th congress. After Monday’s endorsement, it is likely to gain a majority. The calls by Mr Rüttgers for a more socially sensitive platform have gained traction since he urged the CDU in August to shed its “capitalist” image and renounce “old lies”, including the notion that “tax cuts lead to more investment and more jobs”.

The CDU’s retreat from the tough reform agenda it adopted at its landmark Leipzig party congress of December 2003 coincides with a drive by the Social Democratic party, its long-time rival and partner in the coalition, towards the political centre as the two groupings compete for middle-class voters.

Confidential opinion surveys recently commissioned by the CDU and its CSU sister party in Bavaria show these voters are becoming less inclined to accept sacrifices. “The CDU does not want an end to the reforms, but it wants an end to the blood-and-tears rhetoric,” said one person close to Ms Merkel.

Under Mr Rüttgers’ proposal, employees who lose their jobs after working for 40 years would be entitled to 24 months of salary-indexed benefits instead of 12 today. The measure would cost €700m a year, to be financed by cutting benefits to younger jobseekers.

After Mr Schröder’s 2003 reforms, jobseekers are entitled to one year of such relatively generous benefits after losing their jobs. They then receive a flat-rate, €345-a-month payment.

This and other unpopular reforms were blamed for a string of electoral defeats for Mr Schröder’s SPD, culminating in his ousting from the chancellery last year.

Ms Bartsch questioned the fairness of Mr Rüttgers’ proposal, saying “our calculations show that people who are now nearing retirement will actually get more out of the tax and social security contributions they have paid in their lifetime than those who start working now”.

Copyright The Financial Times Limited 2006