Business Expects Cautious Reforms From Merkel

Posted by: Jack Ewing on November 04

Angela Merkel’s speech to the U.S. Congress Nov. 3 provided the German Chancellor with a nice distraction from the drudgery of forming a new government in Berlin. Back in Germany, though, business people are still trying to figure out what they can expect now that Merkel enjoys a majority in the Bundestag with her favored coalition partner, the pro-business Free Democrats (FDP).

On paper, Merkel’s Christian Democrats, the FDP and the Bavarian Christian Social Union have agreed to an ambitious program following their election victory Sept. 27. At the center are bigger-than-expected tax cuts for businesses and individuals. But UBS Economist Martin Lueck doubts whether Merkel will deliver fully on the tax cuts considering that the nation’s debt is already soaring because of stimulus spending. “The tax cuts are far from carved in stone,” Luecke says in a note to investors.

The new government is also unlikely to tamper with laws that make it hard to dismiss workers. Business has long pined for more flexibility to hire and fire employees, but weaker job protections are highly unpopular even among conservative voters. Merkel has made it clear she doesn’t plan to go there.

So don’t expect any earthshaking reforms. Fact is, Germans don’t like big noisy changes. They’re still complaining about labor market reforms pushed through by former Chancellor Gerhard Schröder, even thought the same reforms prompted a steep decline in unemployment. “The government will tread carefully,” says Grace Annan, who follows German politics for IHS Global Insight.

However, there is still room for a series of mini-reforms that, taken together, could be significant. For example, big tax cuts may not be in the cards, but tax simplification could be. Small business would especially welcome a fairer, less complex tax code.

The government could also make labor regulations more predictable. Currently, many disputes between workers and employers wind up in labor court, where judges exercise considerable discretion. Clearer rules would make it easier for managers to calculate ahead of time the cost of cutting staff.

Germany has already made a number of regulatory tweaks in recent years that have helped the economy function better. It’s easier to start a business and easier to employ temporary workers.

Business won’t get its wish list from Merkel 2.0, but can still look forward to better times. Says one U.S. exec with many years' experience in Germany, “There will be subtle changes. This is what Merkel likes.”