Letter to the Editor 

Financial Times

Angela Merkel is set for a true test of her determination.

368 words
29 November 2005
Financial Times
Asia Ed1
Page 14
(c) 2005 The Financial Times Limited. All rights reserved

From Mr George A. Pieler and
Mr Jens F. Laurson.

Sir, Your editorial comment "A determined lady" (November 26) concludes that Angela Merkel, the new German chancellor, "knows that if Germany is to have world influence, it must first put its own economic house in order. That is what the rest of Europe needs, too". Surprisingly, you neglect any consideration of what "putting the house in order" demands in practical terms.
Ms Merkel's grand coalition seems fatally hampered not by the demands of house-cleaning but by lowest-common-denominator coalition economic plans.
Those plans stipulate large tax increases and (as of this writing) minimal regulatory relief, which will neither bring the German deficit in compliance with European Union rules nor enable Germany to finance its overweening welfare state. Without a coherent strategy of bringing Germany to a higher growth path, it surely will be unable to manage its own fiscal affairs, much less lead "the rest of Europe".
While the Merkel-led coalition may be fatally hampered by its very political breadth, the economic answers for both Germany and Europe are not hard to find: reduce tax rates now, including those on corporations; ensure any increases in the value added tax are offset elsewhere to avoid fiscal drag; and significantly reduce the "wedge" cost of hiring additional workers by simplifying and reforming labour regulations and returning a degree of fluidity to the workplace.
The business community in Germany knows this quite well, and its concerns over the direction set by Ms Merkel are reflected in the 1-point decline in business confidence to 97.8 in November, as measured by Munich's Ifo Institute.
Whether German business and political leaders can influence the grand coalition in a positive direction, or only wait out a failed policy platform in hope of a better (and early) election result, will be the true test of how determined a lady

Chancellor Merkel is.
George A. Pieler,
Senior Fellow,
Institute for Policy Innovation,
Falls Church, VA 22046, US

Jens F. Laurson,
International Affairs Forum,
Arlington, VA 22205, US

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