Can Germany be saved? The malaise of the world’s first welfare state

Germany needs a radical cultural and economic revolution, one as courageous as – but not identical to – the one that occurred in Britain under Margaret Thatcher. After 50 years of progressive entanglement, Germany is ripe for this.
Hans-Werner Sinn
VoxEu, 19.06.2007

Despite the current cyclical upswing in Germany, which is largely fuelled by the strongest boom of the world economy in a third of a century, careful observers are well aware of the underlying, and long-enduring, structural problems of this country. Europe’s largest and the world’s third-biggest economy, the world’s first welfare state, is in serious difficulties. Dubbed an “economic miracle” after World War II, the country seems to have been abandoned by fortune. From 1995 to 2006, Europe was the world’s slowest-growing continent, and, next to Italy, Germany was the slowest-growing country in Europe. Even in 2006, when it experienced an extraordinarily strong export boom, Germany’s growth rate just made it to the average of the old EU countries. Once a locomotive, Germany was the laggard of the continent, if not of the world, for the past ten years. Germany has one of the lowest net investment shares of all developed countries, bankruptcies are still high and capital is fleeing to cheaper locations in Eastern Europe and Asia. Unemployment is currently falling sharply, but the level remains high by any standard, and yet the world’s poor continue to arrive at Germany’s doorstep. Although Germany will remain Europe’s biggest economy for many years to come due to its sheer population size, one European neighbour after another has overtaken Germany in per capita income in recent years. Germany was the sick man of Europe, unable to keep abreast with Austria, Denmark, Ireland, Finland, Great Britain, or the Netherlands. The Wirtschaftswunder, the much-admired German economic miracle of the post-war period, had moved on to other places.

Even as the German economy suffers from serious deficiencies, the population continues to dance on the volcano. In tourism, Germany remains the world champion, its cruise ships plying the oceans more defiantly than ever. The pension system continues to be defended, although not enough children are being born to finance it in the future and no real policy changes are being made to address this fact. The German population is shrinking faster than that of any other developed country. Young couples have traded in baby carriages for second cars. Everyone wants to be in love and dreams of happiness, but there are no babies in these dreams. It is simply unquestionably accepted that pensions come from the government, just as electricity comes out of the wall socket.

Germany needs a radical cultural and economic revolution—a revolution as courageous as the one that occurred in Great Britain under Margaret Thatcher, though not identical to it. After 50 years of progressive entanglement, Germany is ripe for this. Who knows, maybe Angela Merkel has a streak of Maggie in her.

Germany’s institutions must be transformed, uncomfortable questions must be asked, and radical rethinking must start. Can the power of the unions continue to be tolerated? Why is the welfare state permitted to pay such generous benefits for idleness? How long can the languishing economy of Eastern Germany be propped up, and at what stage will it be simply too expensive to finance a West German standard of living there? Can Europe tolerate that Germany’s debt to GDP ratio remains way above the 60% limit set by the Maastricht treaty? Must the government tax away two-thirds of even a low-earning worker’s returns to additional effort? Why is Germany’s population ageing so quickly, and can anything be done about this? Should the childless receive a full government pension? Are immigrants a burden, or a blessing? Are the Germans prepared for competition from Poles, Czechs, Slovaks, and Hungarians, whose countries joined the European Union in 2004? Where is the new Europe headed, and what tricks does the European Union have up its sleeve? These questions demand honest answers, and then Germany needs courageous economic and social reforms with which to buy back its future.

The necessary reforms will be painful, and it will take years before these produce any noticeable results. This explains why German politicians, forever with an eye on the next election, have balked at undertaking reforms with the requisite rigour.

Germany may still have a future as one of the world’s top economic powers. But this will require a concerted effort to overhaul its welfare state and its economic system (that is, the laws and institutional rules that define the scope of the economic decisions made by firms and private households). The reforms debated in Germany these days are not nearly enough, but the temporary economic boom in which the country now participates raises in many the illusion that no reforms are necessary. In fact, however, nothing short of a new order, in which old taboos are discarded and powerful interest groups are shown the door, will suffice. It is possible that this reconstruction will not occur until it becomes evident how much Germany’s fiscal system will suffer from the imminent demographic crisis, which could be in the early twenties of this century. But there is no time. If Germany wants to secure its economic future, it has to act now. The figures and facts are on the table. All that remains is to do something to set them right.

My objective in this book, Can Germany be Saved?, is to inform the reader about the state of the German economy, about how a well-functioning market economy operates, and about obvious defects of a welfare state of the German type. But I will try to avoid making prophecies. I am neither a guru nor an evangelist. I am an economist and, as such, I can only describe institutional conditions that, on the basis of past experience and insights from economic theory, would generate a healthier economy. I do not want to take my readers to a new dream world; I want to wake them up to reality. Successful policy decisions require facts and sound economic explanations. I want the economic arguments to be heard, and I hope that hearing them will enable the reader to separate the wheat from the chaff in the public debate. Only broad public support for tough economic reform will derail the demagogues and the dreamers who now monopolise public discussions. I want a better Europe for my three children—a continent that will give them a future.

read on