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Sputtering German Economy Stalls Interlaced Neighbors

Europe: Nation's resistance to reform is stunting growth. G-8 is expected to look at issue.


BERLIN — With rising auto sales providing a rare glimmer of hope on Europe's gloomy economic horizon, Volkswagen sparked jubilation when it offered to hire 5,000 workers from among the long-term unemployed and pay them each 5,000 marks a month.

Thousands from among Germany's nearly 3.85 million jobless--about 9% of the work force--flocked to company headquarters in Wolfsburg the next day to build a new minivan model for the equivalent monthly pay of about $2,270.

But IG Metall, the union representing auto workers that won wage hikes and a shorter workweek last year on promises of greater flexibility, quashed the project, part of a program called "5,000 Times 5,000." The labor bosses who sit on the board of directors--by law in German companies--vetoed the new hires because they would be paid below union scale and the jobs were guaranteed only for three years, not the usual lifetime.

As the failed VW bid demonstrates, this country, which has long been the locomotive of Europe, is now acting more like an overloaded caboose, burdened by its overprotected labor force and dragging down growth throughout the 15-nation European Union.

Production and trade are so integrated within the EU, every setback for the German economy delivers woe to its neighbors because every car not built at Wolfsburg means that many fewer sales of Dutch headlights or French dashboard electronics.

Germany's protected work force is a major barrier to investment needed to create jobs, boost production and get the economic engine of Europe moving. And its failure to loosen the shackles that prevent employers from hiring and firing is likely to come up for criticism this weekend when German leaders meet their counterparts at the Group of 8 summit in Genoa, Italy, to ponder how to speed up the sputtering euro zone.

German officials blame the slowdown from last year's 3% growth to 1% this year on the rapid U.S. deceleration and other "outside" influences such as high oil prices and soaring food costs caused by a sweep of agricultural crises, including "mad-cow" disease.

But, in truth--and Chancellor Gerhard Schroeder has said it out loud--Germans don't want to make the labor reforms that their allies and trading partners say are needed.

"If we look at the claims for flexibility . . . each is connected with a demand that the government take away from large groups of working people parts of their security and ability to plan for their lives," Schroeder insisted last week. "We do not want this kind of change. This would contradict all German and European traditions. We do not want an American labor market."

In the three years since he became chancellor, Schroeder has been taking fellow Germans on what Deutsche Bank's chief economist, Norbert Walter, calls "a roller-coaster ride." It began disastrously with the tax-and-spend excesses of his first finance minister, Oskar Lafontaine, who sought to bring down unemployment by swelling an already bloated public sector.

Hans Eichel, who succeeded Lafontaine two years ago, shepherded through a tax reform that this year returned to German households more than $20 billion, which was expected to boost consumer spending and fuel further growth.

But inflation more than ate up the windfall. Although taxpayers got to keep an average 1.5% more of their income, inflation has been riding well above 3%.

Easing Resistance to Immigration

Analysts concede that global influences are part of the problem. But they contend that the government has failed to build on its few successes.

One of those improvements has been Germany's easing fear about immigration. Schroeder broke through that long-standing barrier when he introduced a green-card program this year to attract technology experts from countries such as India and Russia.

"People are starting to wake up to the fact that just because you've got 10% or 12% unemployment doesn't mean that every job can be filled from within the country," Walter said.

Still, many continue to resist a total liberalization to encourage a healthy flow of workers throughout Europe. Schroeder himself has spearheaded efforts to delay by seven years the right to labor mobility for Eastern Europeans who soon will join the EU. "The mentality has not yet been reset," Walter said.

Schroeder and his left-of-center team are banking on a drop in global oil prices and a U.S. economic upswing to allow the desired spending spree to happen next year, when another step of the phased five-year cut in the top personal income tax from 53% to 42% goes into effect. They insist that German growth of 2% to 3% will be back on track, allowing other struggling economies of the euro zone to surge in its slipstream.

In fact, the other EU countries that will adopt the common euro currency next year are outperforming this so-called economic engine. Combined growth for the euro zone is expected to be between 2% and 2.5% this year, Belgian Finance Minister Didier Reynders told his EU colleagues last week.

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