Intelligence Brief: Germany's Weakened Coalition Affects the E.U.

Posted in Europe | 14-Jul-06

Last week, German Chancellor Angela Merkel was attacked by Social Democrats who were part of the C.D.U.-S.P.D. Grand Coalition as she was trying to promote controversial reforms of the federal health care system. Social Democrats, left-oriented factions and members of the business community expressed their discontent over the proposed reforms. The reforms included increased health insurance fees for next year, together with higher pension funds and a two percent rise in the Value Added Tax.

Social Democrats are concerned that the changes will diminish the welfare system and government guarantees for workers, whereas employers maintain that such costs will hamper business performance as corporations will inevitably have to pay for them.

At the same time, recent surveys show that Merkel's popularity is dropping and that in comparison with the end of 2005, fewer Germans have confidence in the government's ability to steadily re-launch the German economy.

Although Merkel will try to overcome the current political crisis by attempting to reduce the tensions inside her coalition, the health care debate is proving that Germany is one of Europe's most difficult societies to reform. Since 1945, the German welfare system has become part of the national culture. As a consequence, every government that tries to introduce even modest reforms of that system is sure to be exposed to ferocious critics.

Therefore, surveys that showed high popularity for Merkel before she and her coalition began to introduce reforms were not very significant. The real challenge begins now. Germany has enjoyed some positive economic results during the last few months (G.D.P. growth is estimated around 1.4 percent in the first quarter of 2006, while the figure for the entire European Union stands at 0.6 percent during the same period), but such a limited result is not enough for a country that has for long epitomized economic power and wealth. Moreover, German unemployment rates still remain unsatisfactorily high.

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