BAD news on unemployment and public debt will overshadow a prediction of improved economic growth when the German government publishes its annual economic report today.
The government expects the economy to grow by 2.5 per cent this year, compared to 1.4 per cent in 1996 but the recovery will be too weak to make a dent in an unemployment rate of 11 per cent which represents more than four million people.
Rising unemployment will place such a burden on the federal exchequer that Bonn will be lucky to scrape below the 3 per cent public deficit limit laid down at Maastricht for entry to European Monetary Union (EMU).
The deficit forecast expected in the report is 2.9 per cent of GDP. But some economists warned this week that the government figures on growth are likely to be too optimistic and others pointed out that if training schemes and work experience programmes are taken into account, real unemployment stands above six million.
Few Germans need statistics to tell them that something is badly wrong in Europe's powerhouse economy. Empty restaurants, idle taxis and silent cash registers offer a daily reminder that Germany is going through one of its periodic spasms of national belt tightening. What makes the latest bout of economic gloom different from its predecessors is that many Germans now acknowledge that only a profound structural reform will be enough to restore the economic confidence that has characterised their national life since the 1950s.
Almost everyone agrees about the nature of the problem - a huge, expensive welfare state combined with high labour costs that oblige employers to pay more than 80 deutschmark in benefits for every 100 deutschmark they pay in wages and one of the highest rates of personal taxation in the world. Germany's social market economy successfully outperformed most other OECD countries from the 1950s until the 1970s but globalisation has created new competitors in Eastern Europe and Asia where cheap labour is plentiful.
There is less agreement on what to do about Germany's difficulties. Workers are unwilling to abandon their long holidays and generous welfare benefits and every attempt to cut government spending is met by loud protests from the groups targeted. Many companies have already moved production to other parts of Europe, including Ireland, where labour costs are lower. Business leaders warn that this trend will accelerate unless decisive action is taken.
The government made a noisy effort to tackle the problem last year, introducing a succession of four point, ten point and 50 point plans to tackle unemployment. Chancellor Helmut Kohl called a meeting of union leaders, employers and politicians to hammer out a scheme for cutting the jobless figure in half by the year 2000. But, by the end of the year, with each side accusing the other of bad faith, Dr Kohl admitted that the target was unlikely to be reached.
Last week, the government unveiled an overhaul of Germany's tax system aimed at shifting much of the burden from income tax to Value Added Tax. This plan has met with stiff resistance too, not least from within Dr Kohl's own ranks in the governing Christian Democratic Union (CDU). A proposal to tax old age pensions provoked a threat by the Grey Panthers, an old people's pressure group led by a feisty campaigner called Trude Unruh to mobilise the elderly to deny Dr Kohl a fifth term in office in 1998.
Overshadowing all the government's efforts to come to grips with the economy is the drive towards a single European currency in 1999. Although few German politicians openly oppose the introduction of the euro, two thirds of the electorate say they want to keep the deutschmark. In an effort to convince the public that the new currency will be as stable as the mark, Dr Kohl and his finance minister, Mr Theo Waigel, have pressed for a strict interpretation of the economic entry conditions. This led in December to the agreement at the European Union in Dublin, in the teeth of fierce opposition from France, of a stability pact obliging EMU members to maintain the low debt, low inflation discipline after the new currency comes into force.
A new disagreement between Bonn and Paris over the future of the European Central Bank (ECB) that will determine monetary policy within EMU exposes a fundamental divergence of approach between the two states at the heart of the EU. Germany wants the ECB to be entirely free from political interference in setting interest and exchange rates, just as the Bundesbank is in Germany today. France views the central bank as an organ of common European policy and insists that politicians rather than bankers should make the important decisions.
The dispute reflects a basic conflict between Bonn's vision of the euro as a strong, stable currency in the tradition of the mark and Paris' wish to place the currency in the service of the political, economic and social interests of the EU.
The German concept of central bank independence is unlikely to find favour with the third major player on the European stage - Britain - where the parliamentary tradition resists transferring power from politicians to bureaucrats. If Bonn loses the argument over ECB, it risks igniting the public debate in Germany over EMU which has remained underground until now. For Dr Kohl, this could lead to the worst of both worlds - the stalling of his cherished drive for European unity and his own loss of power in 1998.
