On February 8th, 2010, the Bundesverfassungsgericht declared the Hartz 4 social legislation for unemployed benefits and similar welfare acts, enacted as part of the Agenda 2010 reform package, unconstitutional. While this is not one of our usual economic topics, it’s repercussions for the Nation are as severe as any.

The Hartz IV concept, proposed by a commission led by Peter Hartz, was enacted in 2004, coming into effect on January 1st, 2005 in the late days of the Red-Green governing coalition. It has faced tremendous criticism ever since its enactment, and incited protests almost immediately.

The reasons the Constitutional Court gives for its decision are based on the assumptions of basic needs for recipients of welfare payments, used for calculating the welfare payout for unemployed workers. While in general affirming the legislation, the court states that the calculating system used for actually determining the payout of each individual receptive is overcomplicated and in need for restructuring. However, the court did not actually point out that the overall welfare payments were too low, albeit using language which indicated a strong tendency towards such a view. A formal restructuring of both the calculating mechanisms and the structure of “Arge” work agencies is the main point of the case.

With the law effectively overturned, unemployed persons can now apply for additional funding until a new law is passed, beginning in January 2011, which will address the criticised issues.

Calculations considering a possible rise in welfare payments assume that, should the legislation be restated with a higher amount of welfare, going from 359 to 429€, the Nation’s budget will receive an additional blow of about 10 billion €. Seeing as how Germany is not in the position to increase its budget to that amount, we will probably see a revision of the calculating structure that only includes a raise in payouts for the specially mentioned groups – in particular children.
Politically, that kind of revision is the only reasonable way out. Current government policy follows but one logic: The closer welfare amounts are to a real job, the less tempting the search for a job gets. In any case, the reforms of the 2003-5 legislation will present a formidable cornerstone for the current governing parties.