Download The Fall of Germany`s Welfare State

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The Fall of Germany’s Welfare State
The German Model of Consensus decision-making, strong local government, and
generous welfare and educational spending is often held up, in America especially, as
something to copy, however back in Germany it is under server attack (Even). Terms
commonly used to refer to this world-renown type of economy are managed market
economy and social market economy, a term that was coined by Alfred Muller-Armark—
a key advisor to Ludwig Erhard. The German economy has long been the locomotive of
growth for the continent of Europe. Its companies are world class, workers are highly
skilled and the model of labor-management relations has been something to emulate
(MacDonald). It provides near-universal coverage for health, the dole and pensions, it
brought continuity amid upheaval and, since 1945, social consensus. To the politicians of
the left and the right, it was untouchable. It was thought to be and was portrayed as the
perfect mixture of a capitalist society and a socially generous system. Unfortunately, this
is no longer true about the German social market economy. Costs are soaring, benefits are
dropping, and a third of the GDP is now spent on social programs. In fact social
insurance contributions, shared fifty-fifty between the boss and the worker, now
constitute forty percent of pay (Even)!
These events have also made a starker distinction between the two types of
capitalist systems: managed economies, such as Germany and France, and
entrepreneurial-oriented economies such as the United States (Even). At the turn of the
twenty-first century, globalization has allowed the major distinctions to emerge. The
entrepreneurial based market economies are more open to risk, which has allowed them
to adapt to globalization at a much faster rate and with lower unemployment, all while
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achieving higher levels of economic growth. On the other hand, the managed market
economies are surrounded by a safety net which offers much greater equity and more
efficient social programs, but at the cost of high unemployment and much lower
economic growth (MacDonald).
As Noble Laurent economist Amaryta Sen has stated, it is believed that “much of
Europe is caught between wanting equity and needing economic growth. Combining
these two has been the dilemma for the Germans (MacDonald).” The bottom line for this
system is that it is supposed to create equity and growth, and for a long time it did, but
that growth has now ceased; in turn equity and social benefits must be sacrificed to keep
Germany’s behemoth economy afloat.
One of the major social programs that has long been affecting the economy
adversely in an enormous fashion is their welfare system. The German Welfare system
was built on three social assumptions; that the population is relatively young; full-time
work exists for male breadwinners until retirement; there are a few well-off people and a
mass of poor ones. None of these is now true (Even). The population is aging drastically
due to superior healthcare and the economy has allowed a large portion of Germans to
flourish. Meinhard Miegel and Stephanie Wahl, of the “Institut Fur Wirtschafts- Und
Gesellschaftspolitik” in Bonn, have argued in a provocative recent book, The end of
Individualism, that “the welfare state is a bust and Germans will have to cover more
social risks on their own (Even).” Finance minister, Theo Waigel, wants to cut the rise in
social spending, which would otherwise have occurred in 1994-96, by twenty five billion
US dollars (Even).
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Major cuts are very possible and possibly the greatest place to start would be in
the social health care system. That is because there is already a strong privatized sector in
healthcare in Germany. In fact, around eight million Germans pay for Private health-care
(Even). Out of a population of approximately eighty million, that is about ten percent!
Obviously this issue is a classic case of easier said than done. The German public may
contain ten percent that do pay for their health insurance, but with the unfortunate fact
that another ten percent of Germans live below the poverty level the government will not
be able to reduce its health expenditures to the degree, per capita of course, that the US
has been able to. The social part of this social market economy is going to be a very hard
appendage to let go of, or even mutate.
However, for those looking to reform the German economic system, there has
been some reason to feel hopeful, at least as far as the dole is concerned. The government
has proposed cutting the dole from fifty eight percent of gross pay to fifty five percent
and stopping it altogether after two to four years. However, the social democrats, who
have the majority in the Bundesrat has the final say in the matter. They agreed to the
percentage cuts, but not to the time limit (Even). Although this may hinder the attempt
considerably, it is a large step in the right direction.
Another one of the more difficult areas to rid excess spending would be in the
pension system. Unfortunately, the Germans will need to cut into almost all programs
that the government provides. On the top of this list of programs lies the pension system,
which is a very large burden to the younger generation at this point in time; the German
pensioners pay much less into their healthcare schemes than do the more youthful
employed people. However, an amendment would have to be made to save Germany in
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the short term, because direct pension cuts are illegal in the German constitution (Even).
This problem has risen due to the fact that the elderly are living much longer lives. In fact
by 2015, the number of Germans over the age of sixty five will rise from twelve million,
the current number, to eighteen million! Even more impressive is that it has been
projected that by 2030 thirty eight percent of Germans will be over 60, while only sixteen
percent remain under the age of twenty! These numbers are historically unheard of and
are the German economists’ worst nightmare. Pension contributions will actually have to
rise from twenty to thirty percent of wages before long just to keep the pensions at
promised levels (Even). Obviously, this ten percent increase is not welcomed by the
younger generations.
The post World War II Germans seem to have been ashamed by what happened as
a result of their country, and to compensate those whom they may have affected, they
have for the past sixty years been very open—at least West Germany was prereunification—to immigrants. They’ve been so open and so generous that they have
allowed them to partake in all of Germany’s social benefits programs. Unfortunately for
the would-be immigrants of tomorrow, the EU has been expanding greatly since the
1990s. It has been adding new members from countries such as Turkey, Malta, and
Cyprus. Among others, the most prominent bloc of additions comes from the former
Communist countries. In General, regardless of origin, most of these countries have been
poorer and underdeveloped. This wave of new immigrants is causing the German public
to question their ability of their nation to remain free and generous to the rest of Europe
(MacDonald). What this means is that the German public is taking a much sharper focus
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on the issue of immigration, especially regarding the foreigners partaking in their social
benefits that cost what many Germans might say is a fortune!
This influx of immigrants challenges what it means to be German, particularly
within the Muslim community, politicians fumble with the potentially explosive issue as
if they are playing a game of “hot-potato”. “According to the latest census, twelve
percent of Germany’s eighty-two million inhabitants are foreign-born.” These numbers
are by far the highest in all of the European countries as far as racial and ethnic
integration are concerned. What makes it even worse for Germany is that they, unlike the
United Kingdom and France, have not had any real experience dealing with massive
amounts of diversity.
The Muslim Turks are giving the politicians the biggest pain in the neck, so-tospeak. Cem Vzdemir of the Green Party is Germany’s first ethnic-Turkish member of
parliament and is well aware of the many problems unassimilated immigrants pose, and
he surprisingly comes down on the side of the German secular state and assimilation. He
was readily bringing the immigrant Muslim community to task for demanding special
treatment. Vzdemir has also been a very strong advocate of reforming Germany’s
immigration laws. Unfortunately, he recently resigned from an unrelated scandal
concerning frequent-flier miles. He was taking a great deal of heat off of natural born
German politicians by saying what they could not, without being labeled as a bigots and
potentially even neo-Nazi’s. Vzdemir rebutted demands made by the Muslim community
that their daughters not be exposed to sex-education and be completely exempted from
the issue. He said “that is precisely the wrong signal. It is an achievement of Western
civilization that girls have the same rights as boys to find out about their bodies. And if
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we start following the view that they are Muslims, so they have the right to stop their
children from having to confront that, we can simply dissolve our common society.
Everyone has to obey the rules irrespective of whether they are German or non-German
(Nichols).”
For as much help has Vzdemir was to the immigration and integration of the
ethnic-Turks, the German politicians would encounter a great deal more issues and
requests that would be destructive to the ideals the Germany and its citizens hold; those
based on Western civilization. For example, just before September 11th 2002 there was a
raging debate on Germany’s guest worker program. In April of 2001, when Germany was
beginning to overhaul its immigration policies, there were many calls to require its seven
million foreign nationals to learn German as a requirement for staying in the country.
Mernet Kilic, head of the federal advisory council responsible for foreigners, shot back
by demanding that German politicians learn to speak Turkish (Nichols)!
Overall this has created a political ticking-time-bomb and has created major
obstacles in the fight to address the unemployment issue with the Turkish-Germans. In
Berlin alone forty-two percent of the 127,000 Turks are unemployed and very few speak
adequate German, according to Barbara John, a Bundestag member for the Christian
Democratic Union. Since 2000 roughly thirty percent of welfare recipients in Germany
have been non-citizens. Shockingly, this number is more than three times greater than
their share of the population, sending out a clear indication that they are not contributing
to the degree that the proponents of Germany’s lenient guest-worker rules would like to
believe that they are. Given Germany’s overtly generous system of social benefits that are
extended to everyone, citizen or not, that is a great burden. The original purpose of
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bringing guest-workers into Germany was to close the gap between working age citizens
and pensioners (Nichols). At current pension levels the Germans just simply are not
propagating enough to keep the current system afloat.
Interestingly enough, Edmund Stoiber, who heads Bavaria’s Christian Social
Union, has come up with an enticing plan to boost Germany’s own national population in
order to keep their pension system running at the level it was promised. He has put forth
the idea that Germans should be paid to have babies! Currently the average German
mother bears one-point-three children across Germany, Stoiber has concluded that if that
number could be raised to two-point-two that Germany’s population could support itself.
This is critical because over the next half-century Germany’s population could slip from
eighty-two million to sixty-six million. Even worse nearly half of the population would
be over the age of sixty! This would be absolutely disastrous for Germany’s economy, for
the working citizens, and for the pensioners. The only other option to keep Germany
stable would be to import 260,000 immigrants ever year for two decades and then
600,000 immigrants each year for the three following decades. Accounting for emigration
this would result in importing more than 1,000,000 foreigners per year by the year 2020.
It would be nearly impossible for Germany to cope with that number of immigrants.
Assuming that the Germans decided to entice its national-born population to have more
children, their incentive would be 484 USD, more than triple the current rate, for each
child per month in the first three years of its life (More). Until a solution is reached
regarding Germany’s dwindling population of national-born citizens, the economy is in
peril currently and will be even more so in the future.
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Unfortunately, immigration and the welfare system are not the only things
hindering economic growth in Germany. The restrictive laws placed on business,
especially small business which are the backbone of Germany’s economy and every other
market economy, are creating a rather hostile environment for new business to take life
and for old businesses to keep living. The government’s restrictive anti-takeover laws,
which have strengthened the powers of company directors to fight off takeovers, have
had the side effect of discouraging foreign investors (Munchau). In the age of
globalization, if you are not attracting foreign investors, you are almost completely
doomed. Fortunately the government has now recognized the importance of a venture
capita industry and promised to redress this situation (Munchau). However, for the time
being, the situation has severely hindered growth in the private sector. In the new global
economy of high tech and Internet focused businesses and companies require speed, rapid
decision making and risk-taking—all elements counter to what was represented by the
social market economy (MacDonald).
The tight rope around the neck of businesses across Germany has led to a
situation in which job creation is poor at best. Now, the present system’s defenders say
that the “doomsters” underestimate the impact of the relatively youthful East Germans,
the entry of more women into the workforce, the entry of more immigrants into the
country, and productivity gains (Even). However, these factors have yet to help the
argument of those who are defending Germany’s current system. Germany’s relatively
poor job creation has allowed other countries in Europe to either make up ground, or in
the case of the United Kingdom and the Netherlands, to surge ahead of Germany. In fact,
according to the US Bureau of Labor Statistics, German labor costs remain among the
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highest in the world! In 2001, the hourly costs of manufacturing in Germany, including
wages, social-security (health included) and pension contributions, was thirteen percent
higher than the US, forty three percent higher than the United Kingdom, and fifty nine
percent higher than in Spain! Along with business restrictions and expenses another part
of the problem for Germany was that job creation was held back by income and payroll
taxes as well as by generous welfare benefits that fostered long-term unemployment and
early retirement in response to economic shocks (MacDonald). Overall Germany is
afflicted by incredibly high wage costs associated with an expensive social security
system, high taxes, generous healthcare entitlements, a sizeable bureaucracy and rigid
labor markets. Yet many of the changes considered necessary to restore growth entail
greater risk taking. Such measurements would encourage small and intermediate sized
businesses some deregulation on the labor market, and a less onerous tax burden. Such a
path would instill a greater degree of flexibility that would undoubtedly benefit
Germany’s economy and increase their terribly low job creation numbers. Until changes
are made, unemployment is likely to remain at its current level of approximately eleven
percent (MacDonald).
With business owners struggling to make ends meet and workforce contributors
giving nearly a majority of their money to the government in taxes, a result has been that
probably one of the more dramatic reflections of the struggling nature of the German
economy is the massive sums of currency involved in tax evasion. Neighboring countries
such as Luxembourg, Liechtenstein, and Switzerland have long benefited from
Germany’s tradition of higher taxes. Although not quite the highest in all of Europe they
are definitely substantial enough to have long provided an incentive for tax evasion in
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Germany. It has been estimated that approximately three hundred billion Euros of
Germany’s money sits in Switzerland, Austria, Luxembourg, and Liechtenstein Harsh
penalties have long been practiced inside of Germany to avert possible exporters of
German money to foreign countries. However, this policy has had the adverse effect of
ensuring that the money that has gone outside of Germany remains outside of Germany.
As a result the German government considered tax amnesty in order to try and attract as
much currency as possible back into Germany (MacDonald). The current Chancellor of
Germany, Gerhard Schroeder, decided to put that suggestion into action. In the new
Agenda 2010 amnesty has been offered to taxpayers who have long kept their money
outside of the country (Germany).
There is a tendency in Germany not to question unification, economic and
monetary union and the stability of growth pact as possible causes for economic
problems. They’re all treated as taboos (Munchau). However such factors as unification
are undeniably responsible for at least triggering off this economic turmoil. After all, it
was promised by Helmut Kohl, the chancellor in which unification of Germany took
place under, that the unification would not be a burden on the West Germans, would be
relatively painless and the economic explosion that would follow would alleviate the
difference in living standard. However, Mr. Kohl was forced to admit his miscalculation
publicly as the costs of unifying Germany have soared beyond anything that he could
have ever imagined. Kohl created a seven-point-five percent increase in income tax
surcharge for one year and a hefty permanent rise in gasoline tax (Neckermann).
Needless to say, Germany united has not only been a burden on the West Germans, but
an economic burden as well. Ten years ago, it was hoped and proclaimed by many
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intellectuals that this recession was just an economic fluke and a phenomenon that could
not easily be explain, however, history has once again proved the intellectuals to be
wrong and the reunification costs, which currently are two hundred percent higher than
originally estimated, are a definite economic burden on Germany (Neckermann).
If only economic and social issues were the only thing keeping Germany’s
economy down, it may have more hope than it presently does. However, it is becoming a
common belief that current Chancellor of Germany, Gerhard Schroeder, is butchering the
situation both economically and socially. Several years ago Chancellor Schroeder had
vowed to reduce unemployment. He has been nowhere close to delivering and the
unemployment rate has risen from the high nine percentage range to nearly eleven
percent in just a short time. Consequently, his administration is “stuck between the rock
of public expectation of lower unemployment, maintenance of the welfare state, and
upholding of employee rights [all issues he ran his campaign on] and the hard place of
fiscal reality, structural problems (the most pressing of which is the bank sector) and an
economy threatening to head [further] back into recession (MacDonald).” Not only have
Schroeder and his administration made promises that he has failed to keep, and which are
at present almost sacred to Germany’s citizens, but he has continued to reject apolitical
economic advice given by qualified economists and institutions. Abruptly proceeding the
September 2002 elections, “the Bundesbank suggest that the Schroeder administration
tackle labor reform and cut public spending rather than raise taxes. Instead, the
government opted to go with more public sector borrowing, raising taxes, and
strategically cutting subsidies (MacDonald).” The reform in labor was assuredly not on
the “to-do” list for the Schroeder administration and the SPD. The advice by the
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Bundesbank that he had avoided earlier was enacted only a year after the Schroeder
government had rejected the plan. By mid-2003 tax cuts were given clearly indicating
that the administration had made a major mistake and that their prior decisions to raise
taxes were perhaps not the best approach (MacDonald).
After his early mistake in 2002, following his election and the beginning of his
second term, Schroeder took a giant leap and decided to put forth what he called “Agenda
2010”. Agenda 2010 includes cutting welfare programs, loosening job protection
regulations and reducing the incredibly generous healthcare benefits that so many people
across the world have enjoyed (Harnischfeger). This was a big move for Schroeder and
he boasted that the social welfare system that Germany has long been so proud of would
be “reorganized in such a way that in the future they remain both efficient and
affordable.” He added “we are lowering payroll costs so that the creation of new jobs will
become easier (German).” He may be optimistic but others are not. German business
owners, being some of those who are not as optimistic as Schroeder is about the reforms,
are saying that “Mr. Schroeder’s reforms will have little impact on the economy” and
have called for more draconian measures. Initial reactions from bankers across the
country were equally skeptical, indicating that those heavily involved in German
economics were convinced that Schroeder’s huge steps were more akin to those of baby
steps and if not drastic enough an agenda, it will ultimately fail (Paterson). With so many
claiming that the Agenda 2010 reforms are unlikely to give Germany’s economy much of
a boost in the short-term, the chancellor is in for bad news. The consensus is that he is
failing to turn the economy around and that worse he is fully incapable of producing
policy that will turn the economy around. In the media, his Agenda 2010 reform is being
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referred to as “reformlet”, “half-baked”, and “a small step (Sick).” Those are catch
phrases that not only will become common language over the duration of his term, but
will ultimately play deciding factors in his re-election because they indicate so little trust
in him and his administration to get Germany’s economy back up to its rightfully
deserved place of greatness.
Unfortunately, at the turn of 2003 Germany reported its worst economic
performance in nearly a decade, shrinking slightly because of consumer spending and
falling capital investment (Sick). This is very bad news because that demonstrates that
people’s confidence in Germany is declining. Party loyalties are changing as the SPD is
losing considerably in the polls to the CDU. The CDU is showing that they have twice as
much support as the SPD and Schroeder in the upcoming 2006 elections (Maggie). A
new face in politics, much like Mr. Schroeder once was, is now heading the opposition
party, the CDU, and her name is Angela Merkel. She has cast herself as a radical
reformer, and there has been much talk about her possibly being the next Margaret
Thatcher. She is likely to be the next Chancellor of Germany in the election of 2006—
which is going to prove to be very critical as Germany cannot afford to continue
operating at this level of economic decline. As for now, Mrs. Merkel is offering hope to
the many Germans across the country looking for a way to resolve their economic crisis.
It has become entirely apparent that the social market economy has to fall.
As it has become apparent that the social market economy will have to be
permanently changed and possibly become ultimately disabled, alternatives are hastily
being drawn up by all parties in Germany. Luckily, there are multiple European models
for Germany to follow, or to take pointers from in its quest to reconstruct Germany’s
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mighty economy so that it once more is the titan it once was. During the 70s the United
Kingdom, and more recently the Netherlands, have opted for deregulation of their
economies, privatization and greater market flexibility in order to rescue their economies,
which, like Germany is now, were suffering from this new era of globalization—the next
big step in intercontinental trade and economic stability. Other European countries,
Germany included, obviously were reluctant to follow in their footsteps. As the
Organization for Economic Cooperation and Development (OECD) noted in the 1997
Employment Outlook:
Failure of continental European countries to adopt its recommendations reflects
their fear of increased earnings inequality. The question is whether it is possible to
deregulate without suffering these malign effects (MacDonald).
The OECD basically put in polite terms that their inability to take risks is ultimately
going to cost them economic grief, high unemployment, and much distress in the future
until they are able to adapt to this new phenomenon, called globalization. What Germany
is experiencing is not in the slightest, with the exception of unification, unique only to
Germany. Many of the same difficult decisions about drastically reducing the largesse of
the welfare system and instilling greater labor flexibility were made in the United
Kingdom, the Netherlands, and to a lesser degree Finland and Denmark during the rough
economic times in the 1990s—all countries who have been forced to reinvent their
economic policies. Such changes in direction made dealing with new technology, new
means of production and globalization less disruptive and ultimately highly productive
(MacDonald). In fact, it has been well documented by economists world-wide that after
reorganizing their economic system the Netherlands unemployment rate dropped from
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nine-point-two percent in 1985 to two-point-seven percent in 2002. Not surprisingly the
United Kingdom, another European powerhouse, experienced very similar decreases in
unemployment with their numbers dropping from eleven-point-six percent to five-pointsix percent in that same duration of time. In sharp contrast, Germany’s unemployment
rose from eight percent to ten percent in 2002 alone. It now sits at nearly eleven percent
(MacDonald).
Germany is currently faced with many issues economically. Many of them are not
going to be easy to fix. There are many factors to consider and practically everybody in
the German state, citizen and immigrant alike, will be drastically affected when some of
these major changes start to take place. These changes are ultimately going to be
absolutely necessary, because if they are not enacted in some way, either the world
economy will have to change to adapt to Germany’s current situation or Germany will
continue this downward spiral ending up in a depression. The German people and the
German state have the ability to create one of the most powerful economies that the
world has ever know, and I believe they will, but only after the major issues affecting
Germany’s current economic situation are dealt with, and dealt with properly. They will
have to take similar routes to the ones that other European countries, such as the United
Kingdom and the Netherlands, have taken and the Germans will eventually be successful.
The situation is all but hopeless.
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Works Cited
“Even Germans Can’t Afford It”. The Economist. Vol. 330, Issue 7851. 19 Feb. 2004.
Harnischfeger, Uta, et. al. “Pensioners Will Be Hit by German Plans to Cut Subsidies”.
Financial Times (London, England). 30 May 2003.
MacDonald, Scott. “The European Economic Locomotive Slows”. Society. Vol. 40,
Issue 6, p. 57. Sep. 2003.
“Maggie of Mecklenburg”. The Economist. Vol. 369, Issue 8347. 25 Oct. 2003.
“More Babies?”. The Economist. Vol. 358, Issue 8203. 6 Jan. 2001.
Munchau, Wolfgang. “Grounded: Why Germany’s Once Soaring Economy is Failing
To Fly.” Financial Times (London, England). 1 Apr. 2004.
Neckermann, Peter. “Germany’s Reunification Woes”. The World & I. Volume 8, P. 76.
<http://www.worldandi.com/public/1993/october/ci09.cfm>. Oct. 2003.
Nichols, Hans. “Germany Grapples With Immigration”. Insight on the News. Vol. 18,
Issue 36. 30 Sept. 2002.
“Sick Man Walking”. Economist, Vol. 369, Issue 8355. 20 Dec. 2003.
Tony Patterson. “Germany Embarks on Biggest Welfare Shake-up Since War”. Financial
Times. 20 Dec. 2003.