Financial Daily from THE HINDU group of publications
Monday, Mar 28, 2005
Germany: Caught in an economic gridlock
Sipping strong German coffee, I wondered what was happening to Germany. Has the post-war economic miracle run its course? Germany seems to be rapidly moving away a welfare State , to a "farewell" economy!
Yet, why were the Germans so reluctant to bring down the level of welfare , which has become excessive? Why are Germans not willing to give up something in the interest of the larger common good?
The country is so wealthy and has such a generous social safety net that few people feel a sense of crisis. The irony is that the welfare system protects individuals so well that it shelters them from feeling a sense of crisis that is necessary to win support for change.
Comfortable with their lives and leery of proposed reforms, Germans are reluctant to risk what they have, even when confronted with doomsday scenarios of the future.
Into my second cup of coffee and biting into a schwarzwald torte, I was reminded of hara kiri, the Japanese tradition of honoursuicide, practiced by the feudal warrior class to avoid falling into enemy hands.
Around 1500, it became a privileged alternative to execution, granted to Daimyo and Samurai guilty of disloyalty to the Emperor. Like a guilty Samurai, Germans seem to be clinging on to the dagger.With every week comes more grim news about the economy. In Berlin 3,00,000 people chase an estimated 20,000 jobs.
Germany has the world's highest labour costs and taxes, the shortest working hours (with demands from labour unions of 37.5 hours a week), over-regulated labour laws, corporate taxes of 38.6 per cent (West Germany has the highest corporate taxes among the big five economic powers), foreign competition, a rising euro against the falling dollar that is damaging its export-dependent economy, 40-day paid holiday staggered over four times a year, an aging population and to top it all, young Germans who delude themselves into believing that the prosperity will last long enough to support them in their old age.
It is well-known that Germany, like Japan, lifted itself from the ruins of war. But, Germany's growth has petered out in the past decade, and unemployment has risen to alarming proportions.
What was once the economic engine of Europe is now routinely being called "the sick man of Europe," an epithet that formerly belonged to the Ottoman Empire in the 19th century.
Yet there are but few signs of hardship in a nation that just a few years ago was expected to lead Europe's challenge to America's economic dominance. Berlin's trendy Unter den Linden cafes are bustling with customers and the homeless are not seen huddling on the snowy sidewalks.
For Chancellor Gerhard Schroeder, the economy is his biggest headache. Two weeks ago, Schroeder detailed his freshly minted ideas in a speech titled "Out of responsibility for our country, building Germany's strength". And, just hours later, he convened a jobs summit with two major opposition leaders to launch the umpteenth effort to revive the labour market.
Going by appearances, Europe's giant took a step to regain its footing. But that is only the appearance of things.
The flight of capital and investments out of Germany continues unabated. Foreign investment is expected to reach a record high this year according to a survey by the German Chamber of Commerce and Industry (DIHT). Six thousand of the 7500 companies surveyed said they planned to invest abroad and possibly move parts of their production overseas in 2005. Companies like Siemens, Bosch and Daimler Chrysler pay zero taxes in Germany.
Just three months ago, Dr Norbert Walter, Chief Economist of Deutsche Bank assured a group of Indian and German CEOs that while the economic gridlock worried him, he remained optimistic of the future.
In reality, global competition has stiffened. German companies are moving jobs to Asia, including India and former communist countries, such as the Czech Republic, Hungary and Poland. The integration of the European economy under a single currency is making other West European companies more competitive. "Today you can build everything, anywhere in the world", says Mr Juergen Thumann, the new President of the mighty Federation of German Industries (BDI). Business leaders such as Mr Thumann are clamouring for changes that will reduce their labour costs. They want a higher retirement age for pension eligibility. They want cuts in healthcare spending.
Companies claim that because it is difficult to fire workers, they are reluctant to hire thus increasing unemployment. They want a more US-style of "hire and fire" job market.
Business leaders and economists say that Germans, for their own well-being, should take on some of the financial responsibility. In essence, become more American.
That's almost revolutionary in a country where the government has been taking care of citizens for more than a century. Chancellor Otto Von Bismarck introduced a public pension in 1889, half a century before America created social security during the Great Depression. Early last month, Mr Josef Ackermann, head of the Duetsche Bank announced 6400 job cuts, despite the steep rise in profits.
State-owned railroad operator Deutsche Bahn posted its first profit in history, last year. More than half of the toilets in all the trains are kept locked to cut on maintenance and labour costs! Union leaders at IG Metall, which represents 2.6 million workers in the auto, electronics and the steel industries, accuse business leaders of using the economic slump to push their agenda.
Meanwhile, an aging population is pushing up pension and healthcare expenditure, sending German labour costs skyhigh. The absorption of the East speeded up the crisis as Germany extended full benefits to its new citizens. The median age in Germany is 40 and is projected to rise to 48 by 2025.
Most Europeans shudder at the American system, where the apparent price of economic vitality includes 40 million people without health insurance and a much larger gap between rich and poor.
At the end of the Second World War, Germany was in shambles. Industrial output had come to a standstill, and the German currency was practically worthless.There was little hope for improvement. Incredibly, the allies who freed Germany from the Nazis imposed their own form of economic tyranny by retaining Hitler's price and wage controls. Enter Ludwig Erhard, a disciple of the great free market economist Wilhelm Rope. After serving as an economist in Nuremberg, Erhard was appointed head of the post-ear Bizonal Economic Council.
Looking at the post-war wreckage, Erhard realised that only free market policies could get Germany back on its feet. To that end he made two proposals, to introduce a new currency, and then ensure its success by lifting wage and price controls.
History has less as a Chancellor and more as the father of the economic miracle he achieved. It was not his aim to create better people. But as the daily newspaper Die Welt commented, he had the gift to inspire people to strive for higher achievements. Almost immediately, the German economy sprang to life. The unemployed went back to work, food reappeared on store shelves, and the legendary productivity of the German people was unleashed.
Within two years, industrial output trebled. By the early 1960s, Germany became third greatest economic power in the world. And all this occurred while West Germany was assimilating hundreds of thousands of East German refugees.
The Marshall Plan certainly helped, but its influence was not great enough to cause another German "miracle".
Since the 1960s, Germany has turned away from Erhard's free market policies. Many young Germans missed the significance of Ernhard's reforms.
Chancellor Helmut Kohl did take a bold step of uniting Germany, but was a timid proponent of the free-market. After achieving wealth and leisure time by pursing free market policies, a new generation of social engineers devised schemes to divide the wealth, without regard of how it wealth was created. Intellectuals provided the moral support for the move toward socialism, even though the very leisure they used to undermine capitalism was itself the result of capitalism. The process is still going on.
German legend has it that the great medieval ruler, Frederick Barbarossa (Red-Beard), is asleep inside Kyffhauser Mountain in Thuringia, waiting for the day Germany is to be destroyed by its enemies. According to the legend goes, just in the nick of time Barbarossa will be awakened by ravens circling his mountain. He will then rise and save his homeland from defeat and usher in the glory of a new golden age.
Ludwig Erhard didn't sport a red beard, nor does Chancellor Schroeder. There is no evidence that Erhard or Schroeder spend much time near Kyffhauser Mountain. But Erhard did save Germany, at one time, from one of its greatest enemies socialism and brought about one of the great success stories of the modern world.
Today, Germans and Chancellor Schroeder will do well to learn from Ludwig Erhard's example that nothing short of bold reforms will save Germany.
(The author is Europe Director of CII. Feedback may be sent to Mohan@t-online.de)
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