Demoralized German unions may bode well for Schröder

Once powerful enough to virtually dictate government policy, German trade unions are in disarray, and that has opened a rare window of opportunity for Chancellor Gerhard Schröder to push ahead with efforts to revive Europe's biggest economy.

With the economy stagnant for the past three years, Germany's center-left government has tried to reform the labor market, tackle a pension time-bomb that threatens to bust the budget, and repair a universal healthcare system that it can no longer afford.

Yet unlike trade unions elsewhere in Europe, such as in the Netherlands and Scandinavia, where union leaders worked together with government to reform the economy, Germany's biggest trade unions sought instead to block what they called neoliberal economic reforms.

But now the tide seems to be turning in Schröder's favor again. The unions are demoralized, which has also silenced voices friendly to the unions within Schröder's Social Democrat Party (SPD). IG Metall, Germany's biggest trade union with 2.7 million members, lost a strike two weeks ago for the first time since 1954, which has plunged the union into a crisis.

Union members are calling on hard-liner Juergen Peters, slated to become head of the union in October, to resign and make way for a more moderate reformer, Berthold Huber. Union leaders are set to meet on Tuesday.

Other signs that Schröder is gaining the upper hand politically are also emerging. As IG Metall sank into crisis, Schröder announced plans to bring an income tax cut of 20 billion euros forward one year to 2004, cutting the top income-tax rate to 42 percent from 48.5 percent. The move caught the conservative opposition off guard. They are still fighting among themselves over whether to support the tax cut.

The lack of public support for the strike, particularly in formerly communist eastern Germany, shows that voters are readier than at any time in the recent past to accept cuts in Germany's generous social welfare programs in order to resuscitate the economy.

"A change in awareness is taking place," said Schröder last week as he addressed parliament from the floor of the Reichstag. "People are prepared to support the changes."

Usually skeptical economists and commentators see signs of change in Germany. The Bank of America issued a note to clients last week with the headline "A Little German Revolution."

The conservative daily Frankfurter Allgemeine Zeitung praised Schröder, saying that although he lacks the conviction and courage of union buster Margaret Thatcher, he "nevertheless kept his distance from the unions during the conflict over his reform agenda."

Says a cautious Thomas Mayer, chief European economist at Deutsche Bank AG: "Schröder was the most astute politician and sensed the change in the public mood before it fully emerged. Now we need political leadership to make sure reforms really happen.

"This can't be done in just six months. The government's measures can only just be the beginning."

During this government's first term in office - from 1998 to 2002 - German trade unions blocked government efforts to reform the labor market or cut pensions. In the past year alone, German unemployment rose a full percentage point, to 10.7, after IG Metall pushed through a wage increase of 4 percent, even as the German economy was falling into recession.

Union leaders challenged the government in a test of strength and lost. In May, the country's biggest unions launched a revolt against Schröder's economic reforms. At least one union boss, Klaus Wiesehuegel, the head of the builders' union, IG Bau, publicly speculated that the chancellor could be forced to resign if he doesn't yield to union demands. But when asked to support Schröder in early June, 90 percent of the delegates at a SPD convention backed the chancellor.

Demonstrating the change in the trade- union camp, Wiesehuegel told the daily Tagesspiegel newspaper: "Our influence on the party isn't as great as we thought it was." From now on "we will accompany the government's decisions" as a desired "partner in the discussion about social change."

The vote was a slap in the face for the unions, which have a historically close relationship with the SPD.

But IG Metall wasn't ready to give up the fight just yet. Instead, it launched a strike in eastern Germany to cut the workweek to 35 hours from 38 in an effort to bring eastern German workers in line with their western German counterparts. But the strike proved unpopular when it began to force western carmakers to put workers on short shifts. Carmakers also threatened to pull up stakes and move plants to the neighboring Czech Republic, where wages are lower.

The public had already begun to doubt that union policies were good for the economy. The strike's economic fallout had an immediate impact on public opinion. A poll by the Dimap polling agency showed that 70 percent of Germans believed the strike was hurting the eastern German economy. The same poll showed that 49 percent of Germans have little confidence and 20 percent no confidence in the trade unions.

Overall, eastern Germans are more worried about losing their jobs than about working a few hours less each week. After the Berlin Wall fell, eastern Germany suffered massive job losses, but it proved harder for western German unions like IG Metall to organize there. In the most recent strike, IG Metall had to bus western German members to strengthen picket lines, and in some factories as much as a third of the workforce refused to go on strike.

Claus Eilrich, a spokesman for IG Metall, commenting on the lost strike in eastern Germany, says: "There's no doubt that IG Metall miscalculated. We misjudged the political situation, and we estimated that the economic situation in Germany as a whole was more positive than it actually was."

German unions have been in decline for the past decade. After reunification in 1990, around 35 percent of German employees belonged to trade unions. Today union membership has fallen to around 22 percent of the workforce.

"The trade unions are in a deep crisis and have lost their influence on the government," says Bodo Zeuner, professor for industrial relations at Berlin's Free University. "And this makes it easier for Schröder."

Now, say analysts, the unions must do some soul-searching and redefine the role they play in society. "What we need is a change of mentality altogether," says Mayer of Deutsche Bank. "Unions need to change from trying to exert power - which the current leaders have grown accustomed to - to becoming a service provider for their members. But that's a tall order."

While the crisis at IG Metall has given some commentators cause to rejoice, overall, industry and leading politicians hope that IG Metall can quickly resolve its internal power struggle and resume its role as a strong partner in wage negotiations. "If IG Metall doesn't resolve its leadership problem, that will have an impact on the upcoming wage talks this winter," Hans-Werner Busch, head of the employers' group Gesamtmetall, told the Sunday paper Welt am Sonntag. "A divided IG Metall is of no use to us."

Schröder, speaking to an SPD economic conference last week, warned against rubbing salt in IG Metall's wounds. "If mistakes were made during the last strike in eastern Germany - and mistakes were made - then I think it is appropriate that a large organization is given the opportunity to learn from these mistakes. Its members should not be humiliated."