German Business Gives Merkel a New Wish List

Chancellor Faces Calls to Cut Taxes, Loosen Labor Laws

MARCUS WALKER VANESSA FUHRMANS

BERLIN -- German business wasted no time in making demands on the country's next government, after Sunday's election victory by Chancellor Angela Merkel's center-right alliance.

German Election

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Associated Press

German Chancellor Angela Merkel of the CDU waved during the election evening at the CDU headquarters in Berlin on Sunday.

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The country's business leaders, pushing to make sure Ms. Merkel's next government doesn't settle for the status quo, said Europe's biggest economy needs tax cuts, more-flexible labor laws and a better education system.

Jürgen Hambrecht, chief executive of BASF AG chemicals company, hailed the decisive election result as an opportunity for significant policy changes. "The new government has important decisions to make to assure the future of our country, and a clear mandate from the voters was essential," he said.

The new coalition's top priorities, Mr. Hambrecht added, should include improvements to the tax code, new investments in the education system and growth-sustaining energy and environmental policies.

The German Chambers of Industry and Commerce called for a first-100-days program to cut tax burdens on business, overhaul the tax code and improve the availability of credit for firms. Business-unfriendly aspects of Germany's corporate and inheritance taxes are making it harder for companies to cope with the financial crisis, the association's president, Hans Heinrich Driftmann, told reporters in Berlin.

Mr. Driftmann also called on the government to loosen Germany's strict laws on layoffs, which corporate leaders have long criticized as a deterrent to hiring, but which labor unions and much of the public support. "Even if it is a taboo, we need more flexibility in the labor market," Mr. Driftmann said.

Ms. Merkel promised labor unions during the campaign that she wouldn't scrap job-protection laws, a stance that could lead to tensions with the Free Democratic Party, which wants stronger deregulation of the labor market than the chancellor's party. In the campaign, Ms. Merkel tempered her support for business-friendly change with assurances that she is committed to upholding Germany's strong social protections.

In Sunday's election, Ms. Merkel's conservative Christian Democratic Union, its Bavarian sister party the Christian Social Union, and its probusiness ally the FDP won a small majority of seats in Germany's parliament. The victors are expected to form a new government in coming weeks, replacing Ms. Merkel's previous awkward coalition with the left-leaning Social Democrats.

On Monday, Ms. Merkel repeated her support for limited cuts to income taxes, but wouldn't commit to a timetable. Bavarian conservatives want a firm date for tax cuts, while the FDP wants more-ambitious tax cuts and a radical simplification of Germany's tax laws.

Economists warn that the new government could struggle to achieve significant tax cuts anytime soon because of Germany's gaping budget deficits. Some economists predict the government could be forced to raise sales taxes to repair public finances, which have taken a beating in the past year's recession.

Germany's economy, the world's fourth largest after the U.S., Japan and China, is expected to contract by around 5% this year amid a slump in exports and restrictive bank lending. Government subsidies for companies have prevented a steep rise in unemployment so far, but joblessness is expected to increase over the next year amid higher business insolvencies. That would hit tax revenues and drive up social spending, making tax cuts even more difficult.

Business groups and economists also stressed that Germany faces mounting longer-term challenges, including adapting its labor force and welfare state to an aging population, and rebalancing its economy to reduce reliance on exports. Many believe the country has to improve the education and skills of its labor force, particularly in the case of its often poorly integrated ethnic minorities, to stay internationally competitive.

"Germany has a slightly distorted economy," thanks to heavy taxes on labor, which have depressed household incomes and forced companies to focus on exports instead of the weak domestic market, says Alexander Kockerbeck, senior analyst at credit-rating agency Moody's. Global demand for German goods will be "more subdued after the financial crisis," and the German economy will need to be "better balanced between exports and domestic demand," he says.

A weekend vote gave Angela Merkel and her Christian Democratic Union another four years atop the German government. But WSJ's Andy Jordan says Germans also expect another disappointing four years of little social or economic change.

Despite the difficulties, businesspeople from the Mittelstand, Germany's legion of midsize family-owned companies that are the backbone of Germany's export-driven economy and provide most of its jobs, are cautiously optimistic that the new government will achieve more overhauls than the last, bipartisan administration, which was largely immobilized by ideological economic rifts.

"I expect this coalition is going to make changes in the next legislative period that weren't possible with the last one," said Hans-Jochen Beilke, chief executive of ebm-papst Group, a maker of energy-efficient fans and motors. German companies badly need improvements to tax rules, he said, especially the estate taxes that burden family-owned businesses like ebm-papst. Mr. Beilke said he also is hopeful the new government will be less prone to subsidizing or bailing out big industries and companies.

Ms. Merkel's previous coalition with Social Democrats pledged billions of euros in state aid this summer to save General Motors Co.'s Opel unit from bankruptcy, a move cheered by Opel workers but viewed skeptically by many businesspeople.