ANALYSIS: Germany's controversial Agenda 2010 haunts new election

By Andrew McCathie Mar 10, 2010, 12:05 GMT

Berlin - Germany is slowing emerging from its deepest recession in a generation, helped along by a slew of reforms launched seven years ago this month, aimed at a makeover of the nation's once lavish welfare state and its tightly-regulated labour market.

In 2003 then Chancellor Gerhard Schroeder's Social Democrat-led (SPD) government unveiled a package of often painful measures to boost flexibility in the nation's jobs market, cut wage costs and underpin economic growth, which became known as Agenda 2010.

Billed as the biggest social reform undertaken in Germany's post Second World War history the Agenda 2010 was designed to help haul the nation out a protracted period of economic stagnation.

In addition, the programme of reforms were aimed at chiming in with the 2010 deadline for bolstering Europe's competitiveness as set out in the Lisbon strategy agreed to by European leaders a decade ago.

Since the Agenda 2010 reforms were rolled out, 'Germany's international competitive position has improved,' said Rainer Guntermann, senior European economist with Commerzbank AG.

But despite the reforms placing the German economy in a relatively strong position as it faced up to last year's recession, pressure is growing for changes to the package of measure.

In particular this includes the radical social welfare benefit system known as Hartz IV, which forms a key part of Agenda 2010.

Aimed at encouraging those out of work to find jobs, the deeply unpopular Hartz IV changed the face of the country's welfare system - and also created deep divisions in the SDP, which have plagued the party ever since.

The Agenda 2010 program stopped short of the comprehensive economic makeover that Britain embarked on during the 1980s and Central and Eastern Europe introduced following the fall of communism in the 1990's.

However, the Schroeder reforms helped to pave the way for a period of wage moderation in the country that ultimately bolstered its global competitiveness.

Agenda 2010 boosted employment flexibility and served as a springboard into the labour market, said a report reviewing the reforms and released this week by the Institute for the German Economy (IW), which is close to the nation's employers.

This included liberalizing part-time employment, speeding up the process of finding jobs for those out of work and freeing up strict hire-and-fire rules.

Moreover, the reforms helped to usher in a more pragmatic approach from trade unions, which have turned to more company-based wage deals in pay negotiations rather than industry or country-wide industrial sector settlements.

But some economists also believe that the threat of tough Hartz IV unemployment benefit payments has helped to dampen private consumption, which continues to act as a drag on the nation's economic growth.

And now, the Hartz IV program has emerged as a key political issue in the buildup to the May election in the nation's biggest state, North Rhine Westphalia.

Ironically, it was the SPD's humiliating loss at the 2005 North Rhine Westphalia state poll that helped signal the end of the Schroeder government in a national election that year as resentment over Agenda 2010 resulted in SPD supporters deserting the party.

Already Guido Westerwelle, the leader of Germany's pro-business Free Democrats and the junior member of Chancellor Angela Merkel's ruling coalition has called for a fresh start for the welfare state.

In the meantime, support in the Social Democrats has been rising for alterations to Hartz IV including new steps to encourage the unemployed to accept jobs, amid signs that the party is attempting to back pedal on reforms launched by Schroeder.

But the chances of Merkel's conservative-led government pursuing broader changes to the Agenda 2010 program seem unlikely.

As opposition leader at the 2003 launch of Agenda 2010, Merkel paid tribute to Schroeder for his 'courage and determination' for bringing the social system into line with the changing times.

More to the point, as chancellor, Merkel has benefited from the increased economic flexibility resulting from Agenda 2010.

Once very slow in creating jobs, the labour market has more recently appeared remarkably resilient in the face of the recession that tightened its grip on the global economy over the last 12 months.

After a string of monthly falls, unemployment has only now crept up to 8.2 per cent after a severe winter hit jobs in business sectors such as construction.

But in 2003 just after the Agenda 2010 programme was launched unemployment was closer to 10 per cent.