Schröder calls for massive recovery effort

Gerhard Schröder called on Germans to make a "massive effort" to end the country's worsening economic crisis yesterday in a keynote speech to parliament. The Chancellor's address was seen as his last chance to secure the political future of his Social Democrat-led government.

Gerhard Schröder called on Germans to make a "massive effort" to end the country's worsening economic crisis yesterday in a keynote speech to parliament. The Chancellor's address was seen as his last chance to secure the political future of his Social Democrat-led government.

In an 80-minute speech to the Bundestag billed "Courage for peace, Courage for change", Mr Schröder unveiled a package of reforms designed to kick-start the economy by easing Germany's rigid labour market rules, curbing union power and reducing the spiralling costs of its welfare system.

"We will have to make a massive joint effort to to achieve our goal," Mr Schröder said in a speech that was frequently heckled by opposition conservatives. "All forces in society will have to make their contribution: companies and workers, the self-employed and pensioners. Nobody will be allowed to escape it."

The Chancellor's declaration was widely interpreted as his last chance to haul Germany out of its deepening economic crisis, tackle record unemployment and halt the politically disastrous popularity slide suffered by his ruling Social Democratic Party.

"Our problems can no longer be put to one side," Mr Schröder said. "We will cut state expenditure and encourage individual responsibility. I will not allow our remedies to fail because of the objections of interest groups."

Germany's economic position is parlous. Unemployment figures for February topped 4.7 million, a figure close to the post-war record of 4.8 million set five years ago, and several analysts have predicted that the jobless total will hit the politically sensitive 5 million mark by the end of the year. Economic growth has slumped to 0.2 per cent, more than 40,000 companies have become insolvent during the Chancellor's tenure and his government risks breaching EU budget deficit criteria for a second year in succession.

Since Mr Schröder's re-election in September, after a campaign dominated by opposition to a war against Iraq, German voters have deserted the Social Democrats in droves. His party was humiliated in key regional elections in the states of Lower Saxony and Hesse last month and its popularity rating has slumped to 30 per cent – the lowest figure since the Second World War. Opinion polls have shown repeatedly that the government's unpopularity stems from its failure to deliver on its pledges to slash unemployment.

With the opposition conservatives controlling a majority in the Bundestag, Germany's parliament, there has been widespread speculation that Mr Schröder's coalition of Social Democrats and Greens may not survive a second term.

Yesterday's speech was an attempt to combat that threat.In a response to the demands of Germany's disgruntled business leaders, Mr Schröder announced measures that will make it easier for small companies to dismiss staff. He also announced cuts in unemployment and social security benefits which have hitherto contributed to Germany's uncompetitively high labour costs.

The package included a £10bn programme of low-interest loans to promote growth and a veiled threat to Germany's powerful trade unions. The Chancellor said he expected the unions to relinquish the idea of across-the-board pay increases for their members and to start accepting local in-house wage agreements. "If this does not happen, then the government will have to intervene," he warned.

Reports revealed, however, that Mr Schröder is facing stiff opposition from within his own party over his attempt to curb union power and that he has balked at tackling the issue directly.

Berlin's Der Tagesspiegel newspaper said the Chancellor had been persuaded to drop original proposals to end the practice of free collective bargaining by senior party members with close links to the unions. Andrea Nahles, spokeswoman for the party's left wing, said: "The plans are like a shotgun blast directed at his own people."

Germany's opposition conservatives heaped scorn on Mr Schröder's speech. Angela Merkel, the Christian Democrat leader, dismissed the reform package as a series of old ideas that had been tried before. "This is certainly not the great leap forward for Germany," she said.

Economic analysts were equally pessimistic. Horst Siebert, the head of Germany's Institute for Global Economy, said: "It is still not clear how Germany will manage higher economic growth. Mr Schröder's proposals are likely to result in only a marginal improvement on the labour market."

The Chancellor suffered a further setback yesterday at the hands of the conservative majority in the upper house of parliament. The Bundesrat rejected a €15.6bn tax package proposed by the Red-Green coalition that was designed to plug gaping holes in regional state budgets.

Key reforms

* An economic stimulus programme of €15bn of subsidised loans, of which €8bn are low-interest loans for home refurbishment and €7bn for local authorities

* Revamp of business tax rules to stabilise revenues and give local governments more control

* Simplification of tax rules for small and medium-size businesses to reduce accounting rules and cut taxes

* Modernisation of rules to encourage new businesses and create new jobs

* Relaxation of rules protecting workers from dismissal

* Shortening the period when jobless can claim full unemployment benefit and cutting unemployment support