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UPDATE 1-German industry, central bank warn Merkel against reform slowdown
November 20, 2013 / 3:21 PM / 4 years ago

UPDATE 1-German industry, central bank warn Merkel against reform slowdown

(Recasts, combining with industry comments)

By Madeline Chambers

BERLIN, Nov 20 (Reuters) - Germany risks becoming uncompetitive and losing business if it undermines labour and welfare reforms and fails to implement new ones, an industry body and its central bank warned politicians negotiating a new government on Wednesday.

Chancellor Angela Merkel’s conservatives are in talks with the Social Democrats (SPD) on forming a left-right coalition next month, but agreements reached so far on individual policies point to little in the way of deep reform.

The parties have agreed on introducing a minimum wage, a key demand of the SPD, higher spending on infrastructure, education and research plus changes to the incentives system for green energy to curb rising power prices.

European Central Bank governing council member Jens Weidmann, also head of the Bundesbank, warned against undoing reforms that had improved competitiveness in Europe’s biggest economy in the last decade.

He told Die Zeit weekly that Merkel and her prospective centre-left partners wanted to equip Germany for future challenges.

“But that should not mean rowing back on reforms that helped us so decisively when we were still seen as the ‘sick man of Europe’,” he said in a preview of the interview.

“Above all, Germany must invest in education, make the social security system fit for the future and ease access to the labour market,” he said, adding infrastructure investment was also needed but not at the expense of budget consolidation.

The BDI industry association attacked planned reforms to incentives for renewable energy. The parties have said they would change the law to cut 20 billion euros a year of renewable surcharges which are added to consumers’ power bills to fund the shift to green energy and away from nuclear.

But BDI President Ulrich Grillo said: “That’s too little. I say it lacks courage.”

Industry has long complained subsidies are too generous and have pushed up energy prices, threatening firms’ ability to compete especially with the United States where power prices are lower due in part to a boom in shale gas.

The BDI and some firms including chemicals giant BASF have warned companies may have to move abroad if there is not a major reform.

INDUSTRY FEARS

“The future of Germany as a location for industrial companies is at stake,” said Grillo in a statement, saying it concerned 900,000 jobs.

He accused politicians of failing to come up with a strategy to tackle energy costs and said raising targets for green energy was “unrealistic” and “unaffordable”.

He also insisted that exemptions from the renewable energy surcharge be kept for energy-intensive industry. That, however, seems unlikely as the prospective coalition partners have agreed to scale back exemptions, partly due to pressure from Brussels.

A group of industry bodies including exporters and banks also warned against hidden tax rises, saying in a statement this would be “a head-on attack on the competitiveness of Germany”.

Proposals to simplify tax and make the system fairer could hit firms, they said, citing changes to what companies can deduct from tax and limiting allowances for losses.

With Merkel rejecting any tax hikes, the SPD has dropped a campaign pledge of higher taxes on the rich but says funding must be found for infrastructure, education and research.

Parties have agreed an independent panel should coordinate the introduction of a minimum wage though it is unclear whether the level will be 8.50 euros per hour, as demanded by the SPD.

Economists and business oppose plans for a minimum wage and the Commissioner for former East German states warned it could endanger jobs there, as a quarter of workers earned under 8.50, compared to 12 percent in western states.

A further factor complicating the negotiations between Merkel and the SPD is pressure from abroad for Germany to rebalance its economy.

The European Commission is investigating Germany’s high current account surplus, and its euro zone neighbours argue that reducing the gap - by cutting its reliance on the exports that have driven its economic recovery and encouraging higher consumer spending - would help them grow faster. (Writing by Madeline Chambers; Editing by Stephen Brown, John Stonestreet)

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