The high cost of Germany's timidity
By Oswald Metzger
Published: November 18 2002 19:58 | Last Updated: November 18 2002 19:58
Germany is teetering on the brink of economic crisis. Consumer confidence has plummeted; Berlin has been reprimanded by the European Union for failing to bring the swelling budget deficit under control; tax revenues are in free fall; and the five so-called wise men, the government's panel of economic advisers, have torn apart the government's proposed fiscal policy. The mood among investors is bleak indeed.
Any hope that, having secured his re-election, Gerhard Schröder would implement much-needed structural reforms has turned to bitter disappointment. The ruling coalition of Social Democrats and Greens has signally failed to find a convincing strategic vision.
Although it is clear that labour costs are far too high, contributions to state pensions are being increased. Health spending has been maintained, even though the system needs to place more responsibility on private-sector insurers. (State provision is becoming far too expensive for Germany's ageing society.) Rather than cut spending, the government is raising taxes to meet the the shortfall in revenues.
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Such "emergency measures" during tough economic times might be the right thing to do if, at the same time, the thresholds at which the highest-paid and lowest-paid are liable for tax were raised.
Instead of focusing on the causes of the German labour market crisis - the high cost of low-skilled labour - the Social Democrats and Greens have put their faith in the Hartz commission.
This inquiry aims to streamline the operations of the massive federal labour agency; hardly the heart of the problem. Germany's rigid and highly protective employment laws remain untouched. Meanwhile, overtime and the black economy thrive.
Such timidity carries a high price. It means that for the German labour market to pick up, the economy will have to grow by 2.5 per cent of gross domestic product this year. Other European countries can reduce employment with growth at 1.5 per cent.
Germany's malaise stems in part from the poor arrangements made at unification. In the space of a few years, non-wage labour costs were allowed to rise by 7 per cent. With the help of gigantic tax subsidies to the property market, the construction industry hit a golden spell and overcapacities were created, the removal of which still today reduces German growth by more than 0.5 per cent a year.
The rapid adjustment of wages between east and west Germany on a 1:1 ratio created record unemployment in the east. No one, however, questioned the provision of social benefits now taken for granted by millions of people.
Since the short-lived unification boom at the beginning of the 1990s, German growth has averaged less than 1.5 per cent a year, below the European average. Social security costs have risen 2.5 times faster than real GDP over the same period.
Hence the widening gap between government revenues and spending. Two figures illustrate the alarming situation. Almost 42 per cent of all budget spending this year is going to civil service pensions, in particular to the tax allowance for pension schemes. Sixteen per cent of all spending is being eaten up by interest on government debt.
In the recent election, one of the most unusual ever, hard truths about the need for a paradigm shift within Germany's "social state" model were scarcely mentioned. Instead, the weeks before polling day were dominated by the catastrophes of the Elbe floods and the categorical refusal to commit Germany to a war on Iraq.
Both government and opposition encouraged the belief that, one or two problems aside, Germany would somehow get over the economic slowdown - that any adjustment could be organised in a welfare state with social security. The opposition played along, promising a spending spree and huge tax cuts. This was despite the fact that it was not just economic experts who were aware of the looming budget deficit.
Most people gave up on the Social Democrats as a modernising force a long time ago. The party has never been so traditional and trade union focused than it is today. Even the Greens, who worked for years to build a reputation as reformers, have under the leadership of Joschka Fischer and Fritz Kuhns become merely an echo of the SPD - preoccupied with the budget and miles away from creating an economy that is not built on leaving a burden for future generations.
Instead of increasing the electorate's confidence in the benefits of reform, the protection of vested interests - masquerading as upholding social justice - has become the new mantra. Mr Schröder, it seems, prefers setting up commissions to implementing difficult changes.
Germany, a country with immense economic potential, is falling behind the rest of Europe and the world. The tragedy is that its leaders appear unable to see this.
The writer is a former budget spokesman for the Green party |
