German Government Agrees On Face-Saving Pensions Deal

All is not well for Germany's ruling coalition comprising the Social Democrats (SPD) and the Greens. This Friday's crucial vote on the government's pension plans will test the resolve of the coalition for the first time, just six weeks after winning the election.

The junior coalition partner, the Greens, who like to see themselves as the reformist motor within the coalition, have threatened to withhold their support for Chancellor Gerhard Schröder's controversial plan to increase statutory pension contributions from 19.1 percent to 19.5 percent. Following a number of heated debates, Werner Schulz, the Greens' charismatic spokesman on economic affairs indicated that as many as 12 parliamentarians could withhold their support.

Although the Greens are unlikely to follow through with their threat, their excoriation of the senior partner's plans shows how serious the divisions are between the two parties.

Serious dilemma

The dilemma is clear: The Greens, whose percentage of the vote effectively saved Schröder's Social Democrats from losing the election, have been eager to take advantage of their improved standing to push through their demands.

Their leadership is concerned that higher pension contributions will lead to an increase in non-wage costs carried by employers. These costs are already among the highest in Europe and are seen as one of the main stumbling blocks to any substantial economic recovery. However, the Social Democrats argue that an increase in contributions is necessary to offset lower investment activity and revenues.

Face-saving compromise

In what is largely seen as a face-saving exercise, the Greens on Tuesday managed to secure a written statement from their senior coalition partner promising them that steps would be taken to lower non-wage costs in the future and to form a commission that will look at a reform of the pensions system. Christine Scheel, the Greens' spokeswoman for financial affairs welcomed the decision: "This is the right signal for a commission to take up its work with the backing of both coalition parties."

While that move may have placated the Greens temporarily, it will not be enough to gloss over the more divisive faultlines rippling through the coalition. With the ink on the coalition agreement barely dried, several pet projects such as the proposals made by the Hartz commission to create new jobs and a much-needed reform of the bloated social security system are unraveling at the seams. Add to that Germany's biggest problem of dramatically rising unemployment figures and you have a recipe for disaster.

More bad news

And worse is to come for the coalition with new figures out later this week spelling more doom and gloom for Germany. Finance Minister Hans Eichel is expected to reveal details of the emergency new borrowing needed to prevent this year's budget from spiraling out of control. Observers say around €10 billion will be required in extra borrowing on top of the €21.2 billion already earmarked for the original 2002 budget.

While a crisis may have been averted at the last minute, the latest incident does not augur well for the future. With its slim majority, the government can ill afford to become bogged down in an internecinal battle to satisfy the egos of the grandees in both parties. More pressing problems need to be tackled if Germany wants to regain its reputation as an economic pillar of strength in Europe.