Stardate 20021127.1907

(On Screen): In the aftermath of a successful reelection bid, German Chancellor Schröder is now on hard times. After winning the election by being more-anti-American-than-thou (and playing to the left) he now faces not only seriously cooled relations with Washington, but also a post-election hangover as people are beginning to realize that hating America won't solve their deep and chronic economic problems. What with unemployment stuck in double digits, with economic growth stagnant, and with taxes already high, Schröder's approval ratings have plummeted since the election. (It's a shame that no one noticed these things in July and August when it might actually have made more of a difference.)

And he's not helping matters any by proceeding to prove that many of his campaign promises are now "inoperative". The German government is facing a serious deficit as obligatory spending outpaces tax income. That's common during recessions, because as economic activity sags tax income will also sag, and at the same time spending on unemployment benefits and other entitlements will rise. Usually in such times a government will run a deficit and use its spending in part to stimulate the economy.

Unfortunately, that's against the rules set when the Euro was established. No one's permitted to run big deficits, no if's, and's or but's. In order to eliminate that deficit, Schröder proposes to increase taxes.

As might be imagined, this is not popular with taxpayers, and protests are mounting. Some have taken to sending shirts to Schröder's office. (The "shirts off their backs", geddit?) And right now a comic song about Schröder is topping the charts on radio stations, and the associated video (using hand puppets) is very popular on TV, and Schröder is finding it all very embarrassing.

But Schröder, and Germany as a whole, is facing a profound choice. There isn't any magic solution to the problem they face, short term or long term. Either they run deficits, or they increase taxes, or they reduce government spending, or some combination of all three. Them's it; those are the only choices. If deficits are forbidden, and if Germany's voters don't want their taxes raised, then they need to decide what government spending to eliminate. And that's going to gore someone's ox, no matter what, and Schröder's ruling majority is razor-thin and very vulnerable.

If Germany were still using the Deutschmark, they could reduce interest rates to provide stimulus, but the European Central Bank has been told that avoiding inflation of the Euro is its only goal, and it shows little interest in using monetary policy to avoid recession the way that the Fed does regarding the dollar and the US economy. Right now the Fed has dropped the Funds Rate to a historically-low 1.25%. The equivalent rates in Europe are far higher, and as such far less stimulating. (Ironically, this is causing investment money to move from Germany to the US, because the prospect for recovery and growth is higher here.) But Germany has no control over ECB policies, and that wouldn't solve the short term problem in any case.

There have been calls in Germany for "structural reform", which mainly means reduction of entitlement programs, and reduction of both taxes and regulation on business in hopes of encouraging more economic growth, but everything involved would cause lots of short-term pain, some of it heavily concentrated. Will Germany, for instance, be willing to accept new labor rules which make it far easier for companies to lay workers off? Probably not, considering the response to the far-more-limited proposals of the Hartz commission. Almost certainly not, if experience in neighboring France is anything to go by.

Definitely not, considering that the labor unions are a major part of the support for Schröder's coalition. Any significant policy proposal perceived as anti-union (or, in practice, perceived as being pro-business) would cause his government to fall.

They should, though, because it would increase job creation. If a company can't lay workers off, then it will only hire as many workers as it can support during hard times, and not increase hiring when times are good. But if layoffs are easier, then there's less risk associated with hiring and during times of growth those companies will put more workers on staff.

The problem is that if layoffs are very difficult, and if a company staffs up during times of growth, then during a downturn they'll end up with a huge staff and no way to pay them, and the company could go broke. That risk is too great; they won't take the chance. The only way they'll staff up during good times is if they know they can shed expenses (i.e. workers) during downturns.

That's how we do it in the US, and in part because of that we have less unemployment during recessions than Germany does during a boom. Unemployment right now in the US is 5.7%, a rate which Germany hasn't seen for years. It hasn't been