In a Deep Crisis, Germany Begins To Revamp Its Vast Welfare State
July 10, 2003
By CHRISTOPHER RHOADS, Staff Reporter of THE WALL STREET JOURNAL
ESSEN, Germany -- Four years ago, the German social-welfare system rescued Renate Franke.
Soon after her mother died of cancer that year, her son was diagnosed with the same disease. Emotionally drained, Ms. Franke, then 48 years old, quit her job at an electronics company. The state stepped in, sending her to a spa for three weeks and paying her jobless benefits that were close to 60% of her former wage.
But last year, the state got tough with Ms. Franke. It cut her unemployment aid after she refused to take full-time jobs. It told her to sell her car, as a condition for receiving any further social assistance. Sitting one recent morning in her one-bedroom apartment on the outskirts of this industrial city, she said: "I began to fear for my future."
So, too, does Germany. Faced with its worst economic slump since World War II, Germany is beginning to broach some long-held taboos as it comes to terms with a cold reality: The country's economic system doesn't work anymore. The world's third-largest economy after the U.S. and Japan has slid into its second recession within the past three years -- making it the weakest of the world's major economies. Unemployment is hovering at nearly 11%.
The dire conditions are prompting an unprecedented rethinking of the paternalistic role of the state in the country's economic life. In the decades since the war, West Germany and then united Germany had to deal with a catastrophic legacy of military and moral defeat. One source of pride, however, remained constant: the country's economic power tethered to a strong social-welfare system.
Now, the country's downward spiral has made this model no longer affordable. Social spending has reached close to 30% of gross domestic product, the most of any country in the world except for Sweden and more than twice that of the U.S. The national deficit has shot well above limits allowed by the European Commission. In years past, German governments -- on both the left and right -- raised payroll taxes to support the mounting costs. But as companies continue to flee Germany for countries with lower labor costs, the nation's high-cost model of doing business seems to have hit a dead end.
Within the past few months, Berlin's center-left government has proposed reducing unemployment benefits, opening the public health-care system to private insurers, cutting hundreds of millions of dollars of subsidies and easing laws that protect workers from being fired. Late last month, the government brought forward by a year a planned tax cut. Some ministers even want to cut back on the country's famously large amount of free time -- 30 vacation days on average, compared with 12 in the U.S.
While Germans are traditionally change-averse, more than 70% of them now acknowledge there is an "urgent need for reform," according to a recent survey of 356,000 Germans conducted by McKinsey & Co., the German weekly newsmagazine Stern and Internet service provider T-Online. Metalworker strikes in eastern Germany to shorten the workweek sparked such virulent criticism from across German society that they collapsed suddenly late last month -- the first defeat for the powerful IG Metall engineering union since 1954.
Some unions are trying to adapt to the changing times. "Before we had growth, and there was enough to share," says Huburtus Schmoldt, head of the Mining, Chemical and Energy Union. But now, Germans must "reconsider which responsibilities lie with the state and which with individuals."
Such talk would have been heretical not long ago. The governing center-left Social Democratic Party used to point fingers when it came to the country's ills: The European Central Bank kept the interest rate too high in the 12-nation euro area. The U.S. economic downturn weighed on exports. And the costs of integrating the formerly communist eastern Germany, nearly $1 trillion since reunification 13 years ago, dragged down growth.
Now, the government has acknowledged that the mounting costs of its social-welfare system are to blame as well. "It has become obvious that we need a new way of thinking in Germany," said Chancellor Gerhard Schroder, in a speech last week to parliament. "A new mentality -- away from protecting what we have and toward creating new chances for the future."
There has been talk of change before. Since the 1980s, industry leaders and some center-right politicians have advocated revamping the country's social apparatus and inflexible labor market. A decade ago, then-Chancellor Helmut Kohl, a member of the more-conservative Christian Democratic Union, called Germans to task for their high number of holidays, dubbing the country a "free-time amusement park." The comments unleashed howls of indignant protest and the government quickly backed off.
During much of this time, Germany could afford to avoid change. Growth was sluggish but enough to muddle through. That could happen again: The U.S. economy may rebound in time to revive the German economy, allowing German leaders to postpone painful measures.
Still, the country may be sinking into the sort of crisis that paved the way for revamping of welfare and labor practices in smaller European countries, such as the Netherlands, Denmark and Sweden, during the past 15 years. The recession has "brutally exposed all of Germany's structural problems," says Hans Eichel, the German finance minister.
Declining birth rates, longer lifespans, earlier retirement ages, less working time and steadily higher unemployment mean that those paying into the system can no longer support those living off of it. Since 1970, the total number of pensioners and jobless increased by 80% to 16.3 million in western Germany. The number of workers, who together with employers finance the system through payroll taxes, grew by just 4% in that time, to 30.7 million.
In the early part of the 20th century most social needs, such as care for children and the elderly, were handled by the family across Europe. After World War II, much of the responsibility shifted to the state, and the social-welfare system began to grow exponentially. Driving the expansion were European growth rates of 5% or more, spurred by the rebuilding after the destruction of the war. Jobs were so plentiful that countries had to import workers from Turkey and elsewhere. Birth rates soared, which meant that there were plenty of young workers to finance the retirement needs of the relatively few elderly.
Europe could afford to be generous. In the 1960s and '70s, the social role of governments grew well beyond caring for the needy to providing health care, higher-level education, child and old-age care -- for all citizens. "The instruments of redistribution got hijacked by the middle class," says Dennis Snower, a professor of international economics at Birkbeck College, at the University of London. That meant that reversing direction became increasingly difficult, since an ever-larger number of citizens -- and voters -- benefited from the system.
While at the beginning of the 1960s social spending in Europe was only slightly higher than in the U.S., by the end of the 1990s, it was twice as much. "Americans are not as obsessed with social insurance because they think if they work hard they will get rich," says Robert MacCulloch, a professor of economics at Princeton University. And they think that once they get rich, they won't want to be burdened with high taxes to cover welfare costs. In Europe, many feel their chances of improving their lot are lower, increasing their appetite for assistance from the state, he says. Europeans also favor income equality more than Americans, surveys show.
But in some ways, the massive growth of the welfare state has led to just the opposite of what was intended: a less-integrated society through the creation of a growing underclass of long-term unemployed. More than 50% of Germany's 4.5 million unemployed have been without a job for a year or more, making them less employable and more wedded to welfare. The equivalent figure in the U.S. is 6%.
The chances of the unemployed re-entering working life dwindle by the day, not just because their dormant skills become outdated but because the increasing labor costs needed to pay their welfare benefits make firms less willing to hire. Western German companies pay the highest wages in the world, on average nearly $30 an hour in the manufacturing sector, 42% of which goes to social expenses such as health care, pensions and unemployment insurance. U.S. manufacturers pay around $26 on average.
As a result, German companies are shifting jobs out of the country. Edscha AG, a Remscheid-based maker of car-door hinges, in the past several years has moved close to 600 jobs to new plants in the Czech Republic and Slovakia. These include not only basic manufacturing positions but higher-skilled research and development jobs, too. Edscha's headquarters now has just 180 workers, compared with 700 a decade ago. "Our customers are looking for cheaper products," says Hagen Wiesner, the executive in charge of production and quality. "And that's becoming more and more difficult for our German plants to do." The trend will likely pick up next year, when 10 eastern European countries join the European Union.
In an effort to prevent the newly jobless from becoming permanently unemployed, the government is becoming less forgiving. As of this year, singles must move anywhere in the country to fill open positions or lose benefits. Other measures include cutting benefits when a jobless person refuses to accept an opening and enforcing participation in state-sponsored temp agencies.
For Ms. Franke, the former worker in the electronics firm, the tightening of the screws made a difference. She had worked several off-the-books part-time secretarial jobs to augment her welfare payments -- a common practice. But with her state assistance dwindling, in recent months she began looking more actively for full-time work. In May, she landed a job in charge of bookkeeping for another electronics company nearby.
"I no longer believed I could get full-time work," she says, adding that she is considering looking for a larger apartment. Despite her improved circumstances, she is still wary. "So many people are so afraid of the future that no one is buying anything," she adds.
Others say that it doesn't matter how hard the government pushes them to find work -- if there aren't any jobs.
On a recent day in Gelsen-Kirchen, where the jobless rate of nearly 20% is the highest in western Germany, Andreas Haeger, 39, scanned for openings on a computer in the local job office.
Many of the listings on the computer were outdated and filled months earlier. For eight years, Mr. Haeger had worked in the packaging department of a glass maker in town, but in 1998 the firm was sold and the factory shut down.
Since losing his job, Mr. Haeger trained for six months to become a trucker. But the few trucking firms that are hiring tell him he doesn't have enough experience. He says he is doing all right on the $750 a month he gets from the government, but government proposals could cut that by $125.
He never eats out anymore or buys CDs of his favorite music, such as the Irish rock band U2. Since he doesn't have enough money to fix his car, he rides his bicycle most places. "Before, everything was safe and secure here," he says. "But then everything closed."
-- Almut Schoenfeld in Berlin contributed to this article.
Write to Christopher Rhoads at christopher.rhoads@wsj.com
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Hyperlinks in this Article:
German Jobless Rate Drops, but Recovery Eludes Europe 07/09/03
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Germany to Accelerate Tax Cuts in Attempt to Boost Economy 06/30/03
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German Business Sentiment Improves for Second Month 06/25/03
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Updated July 10, 2003 |
