Germany: Anyone overwhelmed by the litany of Irish tribunals this year would have felt right at home in Berlin in the last nine months, writes Derek Scally.

While the Tribunal Tango continued in Dublin and Donegal, hosted by Justices Mahon, Morris and Moriarty, the Reichstag in Berlin was home to Germany's Reform Rumba, captained by the less familiar names of Hartz, Herzog and Rürup.

A German industry leader, a retired German president and an economist all tried their hand at drafting proposals for economic recovery.

The reform proposals, filling miles of newsprint and weeks of airtime, were all means to the same end: reform.

Seldom has a word been so often repeated in the German media: reform of the employment market, reform of the pension system, tax reform, all designed to end three years of economic stagnation and rev the stuttering economic motor of Europe.

The reform dance marathon ended just 10 days before Christmas with a complicated, 10-hour two-step between Chancellor Gerhard Schröder and his conservative rival, Dr Angela Merkel.

Mr Schröder's ambitious reform programme, called Agenda 2010, had been blocked at the final hurdle by the conservative majority in the upper house, the Bundesrat.

The two leaders intervened at the eleventh hour to agree a compromise deal and Germans will now have a chance to digest the reforms over Christmas.

The reform process began in earnest in March when Mr Schröder realised that his existing economic "silent hand" policy of fiscal discipline and budget consolidation was not working.

He did a U-turn and decided Germany was going to spend its way out of the slump that has seen growth slide to just 1.3 per cent annually since 1999 and seen the economy dip in and out of recession this year.

The Agenda 2010 proposals - on more than 2,800 pages - make substantial changes to the fabric of German labour, social welfare and tax law.

Employment protection laws that make it difficult for employers to fire workers will no longer apply to companies with up to 10 employees, while unemployed people will, in future, be forced to accept any work offered to them or face a cut in benefits.

Tax cuts worth €15.6 billion, due to be implemented this year, will instead be introduced over two years in a compromise with the opposition.

The government still hopes the extra money in people's pockets will get cash registers ringing and stimulate the economy.

But the tax giveaway meant that the budget discipline baby went out with the bathwater and Germany, along with France, will breach the Stability and Growth Pact in 2004 for the third time in succession.

Things are likely to get even worse on that front next year, with German economists and the OECD in agreement that Mr Hans Eichel, the finance minister, is highly unlikely to be able to keep the budget deficit under 3 per cent of gross domestic product in 2005, as pledged to the European Commission in Brussels.

Back in Berlin, German politicians were pleased with the reform compromise but political observers complained it was a typical German fudge that would please no one.

Economists say the reform will only contribute 0.2 per cent to next year's anticipated economic growth of 1.7 per cent, if anything.

"They didn't seize the moment," said Mr Klaus Zimmerman, director of the German Institute for Economic Research.

Mr Ludwig Georg Braun, president of the German Chamber of Industry and Commerce, said: "This compromise will hardly bring extra push for hiring or growth."

Economists criticised above all the decision to finance the tax cuts by selling off the family silver instead of slashing the €186 billion paid each year in direct and indirect subsidies.

Three-quarters of the 2004 tax cuts will be financed by selling off holdings in Deutsche Telekom and Deutsche Post.

"We expect no economic effect, rather that disappointment will dominate," said Mr Rüdiger Parsche of the Ifo economic institute in Munich. "Rather than a big starting shot, this is a mini-reform."

Mr Joe Dunphy, Bank of Ireland's Frankfurt representative, says the pessimism is unwarranted and that Germany is poised for recovery.

"Things are still under a cloud but there is a feeling among Germans that they've hit the bottom and that things can only go up, even if it is a slow improvement," he says.

"But that's Germany anyway, always overly cautious. They don't tend to get overly excited about things until they actually happen."

The cautious optimism is borne out by economic data: German business confidence has been increasing steadily since March. Germany's six leading economic institutes have said the economy will grow by 1.7 per cent in 2004, compared with negligible growth this year. An upswing proper, however, is likely to kick in during 2005 at the earliest.

"This reform +compromise is an enormously important sign of ability to change," said Mr Jürgen Kromphardt, one of Germany's so-called economic wise men.

In the short term, any economic recovery will be fuelled by strong export demand - Germany became the world's leading exporter in 2003 - rather than a domestic upswing.

The number out of work is expected to rise to 4.45 million in 2004 despite labour market reforms and only a domestic recovery will send unemployment in the other direction.

Retailers are optimistic that tax cuts will give retail sales a shot in the arm.

Despite the worsening economic situation this year, Christmas trade of €8.2 billion kept pace with last year's turnover.

"The tax reforms are not what everyone wanted but at least we have clarity and that should stop a further negative influence on consumption," said Mr Hubertus Pellengahr, head of the German Retailer's Association head office in Berlin.

Tax cuts and employment reforms aside, Mr Schröder is, above all else, banking on a psychological turnaround in 2004.

After a difficult year in Germany, he has nevertheless succeeded in making Germans finally realise that the state, even one run by a Social Democratic government, can no longer afford to pay for everything.

It has finally begun to dawn on people that they too have a personal responsibility for their future through private pensions and that many things in German life are a privilege not a right.

At the end of the day, Germany still has huge strengths, despite its current economic woes and the fashionable talk in the financial press of the "German patient".

Germany has no industrial equal in Europe, it boasts an incredible infrastructure and an expensive but extraordinary health care system where waiting lists for beds, let alone trolleys in corridors, would be considered malpractice.

Germany has shown in 2003 it is capable of structural change, even if at a slow pace.

But more importantly, the reforms have not hastily dismantled the social state in favour of a short-term spike in economic growth.

Mr Schröder's reforms may not be the big gesture he had hoped for, but it is a start. Any economic recovery in 2004 will make further reform pills easier to swallow and see an improvement in the chancellor's political fortunes.

"The government could gradually regain the trust it lost," said Mr Manfred Güllner, director of the Forsa polling institute of Mr Schröder's reforms.

"2004 could be a turning point," he added.