Job Subsidies May Clash with EU Law

Germany's master plan to halve unemployment by 2005 with the help of federal aid to companies which agree to hire may have hit a dangerous snag even before its imminent enactment. A new EU antitrust regulation threatens parts of Germany's Hartz plan by cracking down on public subsidies paid to private businesses to promote employment.

Government's Hartz Commission's proposals on labor market reform, which are still undergoing fine tuning, were supposed go to the Bundestag parliament for action on Friday. This job legislation provides government financing for the payrolls of job placement agencies and for temporary employment contracts offered to workers older than 50.

These provisions as well as other aspects of German labor-market policy could run afoul of an EU antitrust regulation issued on Nov. 6. This regulation says that wage subsidies for specific industries and regions must not exceed 50 percent of wage costs. Governments wishing to exceed this limit would have to apply for special exemptions from the EU Commission.

Apart from affecting the public financing of placement agencies' payrolls, the EU edict could become a problem for job-creation schemes with which German taxpayers typically bankroll 30 percent to 75 percent of wages, and in some cases even more. Some 134,000 people are employed in Germany's ABM job-creation programs, 96,000 of them in eastern Germany. Altogether 1 million Germans benefit from publicly financed employment schemes, including government-sponsored training, make-work programs and direct wage subsidies.

A Hartz proposal to help idled aging workers re-enter the labor market may also conflict with EU legislation. The Hartz commission would assign such employees above the age of 50 a blanket allowance to cover temporary employment contracts. Temporary employment for workers below 58 years of age is heavily regulated in Germany. Even the current legislation, however, is legally contested and widely considered to violate EU law.

The Hartz Commission initially contemplated recommending EUR150 billion ($151 billion) in hiring subsidies for companies. That amount was reduced to EUR20 billion before the plan was unveiled last summer and embraced by the government. EU antitrust rules would govern if subsidies to employers are deemed excessive.

Germany has a record of defying the EU even on issues of less significance. The EU Commission's Internal Market Scoreboard shows Germany trailing most other EU countries, having failed to enact 11 internal-market directives by a deadline of March 1, 2001. Only France has more homework to do with 14 directives still ignored by national law. France and Italy are the only countries with a worse record than Germany on adopting internal-market directives. Currently 143 infringement proceedings are pending against Germany.