Schröder's Reform Package Blocked, Compromise Possible

Parts of Chancellor Gerhard Schröder's reform package met resistance in the opposition-dominated upper house of parliament on Friday, delaying a decision on a €15.6 billion ($17.84 billion) tax break designed to breathe life into Europe's largest economy.

The Bundesrat voted to refer a plan by Schöder's coalition government of Social Democrats and Greens to pull the tax breaks ahead one year to 2004 to a mediation committee. The body, dominated by the Christian Democratic Union and Christian Social Union, also said passage of the tax breaks was dependent on relaxing Germany's hiring and firing laws.

Schröder reacted angrily to the Union's move to connect hiring and firing with the tax breaks, saying the two had nothing to do with one another.

"I think the Union should really ... decide whether such a connection, made purely on tactical grounds, is in the interest of the people," Schröder said immediately after the vote Friday morning.

The mediation committee, made up of parliamentarians and representatives of every party, has until Dec. 17 to debate the proposed changes. If the bill, passed by Germany's lower house of parliament, isn't approved by Dec. 19 it cannot become law on Jan. 1, 2004.

Economic impulse badly needed

Both Schröder's government and the opposition see the tax breaks as an important factor in reviving Germany's slumping economy. Less taxes to pay means more money to spend for Germans in a country where consumer spending is traditionally low.

The two sides differ on how much of those tax breaks should be financed on credit. By lowering taxes, the government will have to borrow more to close up budget holes. The coalition government wants to finance up to 80 percent of the tax breaks by borrowing.

Union party leaders on Friday said that would increase Germany's already record debt, and called for a limit of 25 percent.

"We want to make (the tax breaks) possible with other financing options," said Bavarian Premier and former chancellor candidate Edmund Stoiber. "But not through financing on credit."

IMF wants agenda implemented

In addition to the tax breaks, the Union also referred the other main tenets of Schröder's Agenda 2010 reform plan to the mediation committee. The merging of unemployment and welfare benefits to reduce the amount the state pays out, a business tax reform designed to pump money into Germany's bankrupt cities and plans for a tax amnesty and tobacco tax were also temporarily delayed.

Schröder has tied his political future to the massive reform agenda. The tax breaks are designed to offset some of the income lost due to the cost-cutting reforms, which will trim benefits and force people to pay more for health care. They come at a time when Europe's largest economy is starting to show signs of life.

The International Monetary Fund predicted a 1.5 percent growth rate for Germany in 2004. The world financing body also greeted the Agenda 2010, saying it should be implemented in full.