/www.bloomberg.com/ By Rainer Buergin
Berlin, March 14 (Bloomberg) -- Chancellor Gerhard Schroeder, trying to reverse a ``dramatic'' weakening of the German economy, announced the biggest cuts in welfare in more than two decades and said he'll make it easier for companies to fire workers.
``The restructuring of the welfare state has become unavoidable,'' Schroeder said in a speech to the lower house of parliament. ``We must be ready to change from within.''
Schroeder is taking on the unions that helped him win September's election as his popularity declines to a record low. The unemployment rate rose to 10.5 percent last month. Today's steps won't do enough to turn the tide as Europe's biggest economy skirts recession, economists and investors said.
The government will shorten entitlement for jobless benefits to as little as 12 months from 32 months and cut welfare for the long-term unemployed, Schroeder said. He pledged to make it easier for companies employing more than five people to dismiss workers and limit legal action by allowing employers to offer fixed levels of compensation, he said.
``He's taking on the unions and moving the frontline of war from Iraq to Germany,'' said Eva Vorbauer, who helps manage 10 billion euros ($10.8 billion) at HSBC Trinkaus Capital Management in Dusseldorf. ``This isn't a landmark formula for recovery --it's a bunch of steps in the right direction though.''
Schroeder also pledged to pump 15 billion euros into housing and local building projects to ease a construction industry slump that is entering its ninth year.
Construction Stocks
German stocks rose. Bilfinger Berger AG, the country's second- largest builder, rose 2.9 percent to 18.99 euros at 13:10 p.m. in Frankfurt. The benchmark DAX stock index climbed 2.75 percent to 2419.01.
The DAX has shed almost 60 percent in the past 12 months. Companies including Siemens AG and Deutsche Bank AG have cut jobs to improve profit margins.
Labor unions reject any cuts in welfare and have resisted the government's plans to make firing easier. Three-quarters of Schroeder's Social Democratic Party belong to the DGB federation of labor unions. Schroeder threatened government ``action'' should unions and employers fail to make wage accords more flexible.
The cuts in welfare ``will inflict grave material damage on the socially weak,'' said Michael Sommer, president of the DGB federation of German unions. ``This step must disappoint us.''
Kreditanstalt fuer Wiederaufbau, a state-owned bank, will make 8 billion euros available for housing modernization and 7 billion euros for local authorities to invest in services and infrastructure, Schroeder said.
Benefit Cuts
Unemployment benefits will be cut to the same level as social welfare, Schroeder said. Jasper Neite, an economist at M.M. Warburg & CO. KGaA in Hamburg, said he estimates that the measure will save the government about 2 billion euros a year.
``We have to think about our aid programs and ask -- is our aid really aid?'' Schroeder asked. ``No-one will, in future, be allowed to put up his feet at the expense of society. Anyone who rejects appropriate work will face sanctions.''
Less than one-third of Germans trust Schroeder to take the right steps to boost the stagnating economy, a poll by the Forsa institute showed. Four out of 10 Germans polled by Munich-based Polis said the unions are to blame for Germany's economic woes because they have blocked reforms.
Schroeder will require the backing of the opposition- dominated upper house of parliament to put some of his proposals into law. The upper house today rejected a government bill raising taxes that Finance Minister Hans Eichel has said is necessary for Germany to comply with European Union budget rules.
Budget Strains
``The big issue is whether Schroeder has the political will and power to turn intentions into legislation,'' said Ian Stewart, chief European economist at Merrill Lynch & Co. in London. ``Schroeder seems to be preparing the public for change.''
European Union budget rules have prevented Schroeder from cutting taxes to boost growth. Germany's budget deficit was 3.6 percent of gross domestic product last year, breaching the EU's limit of 3 percent.
Schroeder said the government won't cut taxes any further than it already plans in 2004 and 2005. His government has passed laws cutting taxes by about 7 billion euros next year and 18 billion euros in the following year.
``If we were to cut taxes beyond those targets, we would have to raise value-added tax,'' Schroeder said. ``And that we can't afford.''