Gerhard Schröder

Bundestag, 14 March 2003: Chancellor Schröder gives a landmark policy speech, announcing unprecedented reforms to Germany’s social system and labor market (photo: Marco Urban).

On 14 March 2003, at a speech before the Bundestag, Gerhard Schröder unveiled Agenda 2010, the most extensive reform of the social system and labor market ever planned by the German government. The proposed reform package grew out of a structural crisis that was marked by high levels of unemployment, slow growth, and financially overstretched welfare programs. Internationally, Germany had become known as the “sick man of Europe.” Agenda 2010 answered the challenges posed by globalization and an aging population at home, making the labor market more flexible, keeping social welfare contributions affordable, and lowering taxes for employees and companies. The reforms also provided for increased investment in research, education, and childcare. Agenda 2010 succeeded in establishing the idea of a welfare state that creates more individual opportunity while demanding more individual responsibility. Due to the new burdens and welfare cuts associated with Agenda 2010, however, the reforms met with strong social and political resistance, though not enough to block their ratification. Thanks to the reforms, Germany’s economic competitiveness grew stronger and the number of unemployed dropped by around two million. Even more impressively, these improvements occurred even as the global economy faced severe headwinds, with many industrialized countries witnessing sizeable rises in unemployment.

For more information, see Statement by Gerhard Schröder from 14 March 2003.

Following Schröder’s reforms unemployment sank continuously in Germany. This positive trend continued even after financial crisis and economic recession led to sharp increases in EU-wide unemployment. Declines in Germany’s youth unemployment were particularly strong.

The reforms to the labor market and unemployment benefits originated in proposals submitted by an expert commission headed by Peter Hartz (which is why they are commonly referred to as the “Hartz reforms”). The reforms expanded temporary work along with low-wage and short-term employment, instituted a legal right to part-time employment, and promoted start-ups. In addition, they relaxed employee protection laws to make hiring easier for small businesses, restricted early retirement to keep more people in the labor force, and liberalized Germany’s Trade and Crafts Code to make it easier to form companies. Most of the public debate focused on the reforms to unemployment compensation. The reforms eliminated redundancies by combining welfare and unemployment assistance into a single system. The new laws also set a limit to the duration of full unemployment benefits. The unemployed now receive benefits in proportion to their previous income for a specific period (generally 12–15 months). Afterward they receive a minimum benefit (known informally as Hartz IV) for the remaining time of their unemployment. The dual principle of forcing the unemployed to accept greater responsibility while also providing greater assistance increased pressure on the unemployed to accept reasonable work while improving state-funded unemployment services such as training programs and job placement.

Reforms to the labor market and pension system made it increasingly easy for older individuals to find work. The employment-to-population ratio among 55–64 year olds rose continuously in the years following Schröder’s reforms.

A series of gradual reforms to the pension and health insurance systems were designed to safeguard social programs for the future and keep them affordable in the face of demographic aging of the population. The federal government also introduced state-subsidized private pension plan (known as the Riester pension and as the Rürup pension) to supplement existing state and company schemes. The benefit level was readjusted in 2004 using a sustainability factor that based state pension levels on the ratio of workers to retirees. The reforms expanded the system of company pension plans and began the process of raising the minimum retirement age to 67. (The new retirement age became law in 2008.) The legislation stabilized the costs of state pension benefits despite an aging society, ensuring that they would remain affordable for the foreseeable future. Two health-care reforms – one in 2000 and 2004 – slowed cost increases by introducing higher premiums and cutting selected services. The reforms to the social insurance system lowered contributions for employers and employees, which improved competitiveness and fueled job creation.

Tax cuts implemented gradually between 1998 and 2005 led to sharp reductions in Germany’s personal income and corporate tax rates.

During the chancellorship of Gerhard Schröder tax policy underwent two basic kinds of reforms. On the one hand, new environmental taxes helped better regulate fossil fuel consumption, while the additional revenue they generated went to lowering social insurance contributions and creating new jobs. On the other hand, tax cuts reduced the burden on employees and companies. The income tax rate fell in several stages, with the lowest tax rate dropping from 25.9% to 15%, and the highest tax rate dropping from 53% to 42%. It was the greatest tax cut in the history of the Federal Republic of Germany. Corporate taxes were lowered to stop companies from relocating abroad and to strengthen Germany’s traditionally strong middle class. The corporate tax rate sank from 40 to 25% and local business taxes were reduced for small to mid-size companies. A finance reform passed in 2004 strengthened the financial power of municipalities, improving their capacity for performing communal tasks.

On 11 June 2001 Schröder signs an agreement to phase out nuclear power. Seated on his right is Jürgen Trittin, Germany’s environmental minister; on his left is Ulrich Hartmann, the CEO of the energy provider E.ON (photo credit: Marco Urban).

In 2000 Gerhard Schröder reached a consensus with German power utilities to phase out nuclear energy. The new policy halted the reprocessing of fuel rods and restricted the disposal of radioactive waste to temporary and permanent facilities located near reactors. The decision ended one of the most contentious debates in postwar Germany, symbolized by violent protests at nuclear power stations in Wackersdorf, Brokdorf, Gorleben, and elsewhere. The nuclear phase-out was part of a massive shift in Germany’s energy policy toward sustainability. At the heart of this shift was the German Renewable Energy Act (EEG), which was designed to promote the use of renewables by setting favorable grid feed-in tariffs for renewable energy suppliers and by fixing a minimum price for clean power. Due to its success – the share of renewables in Germany’s power production doubled between 1998 and 2005 – the legislation has since served as a model in more than 60 countries. Today, the world sees Germany as a pioneer in national resource conversation and climate protection. In 2010, Chancellor Merkel’s administration decided to put the nuclear phase-out on hold, but later recommitted the country to abolishing nuclear power after the Fukushima disaster in Japan.

Chancellor Schröder holds a discussion with students in 2004 in Berlin. The pro-family policies implemented during his chancellorship improve the compatibility of work and family life – for example, through the expansion of all-day schools (photo credit: Marco Urban).

The social policies of the Schröder administration were guided by a spirit of tolerance. A reform in 2000 modernized Germany’s nationality laws, which until that time had been based on an outdated notion of blood and parentage going back to 1913. The reform made it easier to become a German citizen, the aim being to integrate, not exclude, the fifth of the population who are either immigrants or whose parents or grandparents settled in Germany from abroad. In 2004 the federal government enacted a law to promote the integration of immigrants into German society through language courses and other concrete measures. Important changes occurred in other areas of society as well. In 2001 Germany passed legislation allowing registered same-sex partnerships, conferring gays and lesbians most of the rights of opposite-sex marriage. The reform was politically controversial; three German states challenged the law before Germany’s Federal Constitutional Court, though the judges ruled against them. In the area of family policy, the administration put a new emphasis on helping people reconcile work and family. This included a nation-wide expansion of all-day schools, better support for childcare facilities (especially those accepting infants and toddlers), more flexibility for parental leave, and the right to part-time work. Gerhard Schröder also broke new ground in cultural policy. Among other things, he was the first Chancellor to elevate the position of Commissioner for Culture and the Media to the level of state minister. He also increased federal expenditures for culture, especially for the German film industry.