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boost Europe's top economy but analysts questioned Monday how far she
will pursue crucial but contentious reforms. The German Association
of Chambers of Commerce and Industry (DIHK) called her victory in
Sunday's election "a clear vote for courageous reform." Its president
Hans Heinrich Driftmann said corporate tax cuts should now be "high
on the agenda." The Federation of German Wholesale and Foreign Trade
called for "simplified taxes, less bureaucracy and more
entrepreneurial freedom. " But analysts wondered how far the
conservative Merkel would go in making painful reforms after she
stressed the need to "maintain a balance between those who create
jobs and workers." During her first campaign, Merkel had called for
major changes to Germany's economic system. It provides generous
social benefits and its heavy reliance on exports left it exposed
during the global economic downturn. "Over the last four years her
position has become quite blurred" while she governed with the
centre-left Social Democrats in a cumbersome "grand coalition,"
Goldman Sachs economist Dirk Schumacher told AFP. "Where does she
actually stand" now on the issue of restructuring the German social
economic model, he asked. The new government faces a mountain of
serious challenges, including rising unemployment and a huge public
deficit that stems from efforts to buffer Germans from the worst of
the international crisis. At the same time, Merkel's new coalition
partners, the business-friendly Free Democrats ( FDP), have gained in
strength and will push for multi-billion-euro (dollar) tax cuts and a
simpler tax code. "The new government must therefore manage a tricky
balancing act between fiscal consolidation and implementing new
strategies for supporting growth," UniCredit economist Alexander Koch
wrote. Business daily Handelsblatt said FDP leader Guido Westerwelle
"should demonstrate the courage of new thinking and demand a super
ministry of economy and finance -- and then lead it himself." But
Commerzbank chief economist Joerg Kraemer noted that "scepticism of
the Germans against capitalism has risen significantly," despite the
FDP's strong showing. "This makes a general shift in economic policy
quite unlikely," he said. The country's crumbling demographic base
could eventually force Germans to retire later, and education reform
is needed to help disadvantaged youths gain full access to the jobs
market. "Otherwise you'll have a growing percentage of the population
who are just dependent on government transfers and who won't be able
to get a job," Schumacher warned. The jobless rate has been largely
held in check by state-subsidised shorter working hours but is still
expected to climb from its present level of 8.3 percent. "The silver
bullet would be a lower tax and social security burden in order to
avoid another round of stagnating real income," Koch wrote. But he
agreed that "the fiscal leeway in the next few years is slim," since
Germany expects to breach EU deficit rules until 2013 at the
earliest. Bank of America Merrill Lynch European economist Holger
Schmieding therefore anticipated "some tax cuts, spending restraint
and modest structural reforms to strengthen the incentives to work,
invest and create jobs." The Sueddeutsche Zeitung daily said Merkel's
inner drive for change was not lost however, and quoted her as saying
recently that " Germany is in a global competition and can take
nothing for granted." She warned Germans again Sunday: "We have a lot
of work ahead of us." Schumacher concluded that "if that's the
genuine Merkel, then we'll see some kind of more pronounced reforms"
in the next few years.
