Reforming a Welfare State: How Germany
is Coping with Globalisation
presented by Mr.
editor-in-chief of DeutschlandRadio Berlin, at the Friedrich Naumann
Foundation Alumni Group meeting, Makati City, 29 January 2004
Bill Clinton once
said, “It’s the economy, stupid”. He
was convinced that the economy decides the outcome of elections.
economy is an important factor in the personal well-being of people.
That is why my analysis on “Reforming a Welfare State: How Germany
is coping with Globalisation” will focus on economic matters.
Germany continues to be one of the wealthiest industrial nations.
In many parts of the world, the so-called German economic miracle
was admired. A nation totally destroyed at the end of the Second
World War—a war initiated by the Germans themselves—developed into
a democratic and stable country. This is an example of the success
of what we term the social-market economy—an economy with entrenched
labour protection laws and a generous welfare state.
This is one side of the coin. The other side is less shiny:
Germany today is branded as the “sick man of Europe”. According
to many observers, the weakness of the German economy has become
the biggest problem for the European Union. In terms of economic
growth, Germany has been the tail-light for the past three to four
years. In 2003, we even had a recession. Unemployment remains persistently
high, at nearly eleven percent in the whole country, and nearly
twenty percent in the Eastern parts of Germany. More than four million
Germans are unemployed. Many of these individuals have little chance
of finding a job again, especially if they are older than fifty
Economists describe the situation as stagnant. The lack of economic
dynamism, they say, has a negative impact on employment—it has led
to rising pubic deficits, which in turn has adverse affects on the
social security systems.
But then again, things are not as bad as they sometimes appear
to be. Nobody in Germany suffers from hunger—or nearly nobody, I
should add. Political asylum seekers from many parts of the world
prefer to live in Germany because they know that it is a place where
they can live in peace and security, and also in relatively good
economic conditions. Germany is still a rich country compared to
her neighbours, especially compared to nations in the East of Europe
(which will become members of the European Union in May of this
Still, living conditions in Germany have been getting worse in
recent years. The collective sentiment among the people is that
Germany is falling back in the global competition. While other countries
are more dynamic, there is a sense of stagnation in Germany.
Let me mention one issue that may interest the people of the Philippines,
a country which has a growing population. We in Germany have one
of the lowest birth-rates in the world. Because of this demographic
situation, the society is getting older and older. The shrinking
population has very adverse effects on our social security systems.
While fewer people pay into the social security systems, more people
take money out of them. If nothing is done to correct this trend,
these systems will collapse. Therefore, this demographic development
is a major reason for the urgency of reforms in Germany.
It is not uncommon in our societies for people to blame others
for certain problems—and never themselves. In Germany, blaming globalisation
is fashionable. University students and intellectuals sympathize
with the critics of globalisation. ATTAC, a European organisation,
has many supporters in Germany who take part in demonstrations against
international conferences of the World Bank, or the G8 meetings.
One might wonder about this attitude. Undoubtedly, Germany benefited
from globalisation at a time when neither the word nor the concept
was yet invented. To a great extent, Germany’s economic success
relied (and continues to rely) on access to the world markets, free
trade and—increasingly—the common European market. Thus it might
sound a little bit strange that nationals of the same country, which
is often referred to as the “world champion of exporting nations,”
But these critics are not the big global players such as Daimler
Chrysler and Siemens, who understandably praise the advantages of
globalisation. I am talking about students, intellectuals, journalists
and – they should not be forgotten – the growing group of unemployed
people in my country.
During recent years some people got richer, but many got poorer.
The state as a whole got poorer. More and more debts piled up in
the state budget. Against this background, no serious person in
Germany would question the necessity of fundamental reforms. To
put it differently: in order to preserve and secure the welfare
state, the same welfare state needs to be reformed. For too many
years, the Germans have lived far beyond their means. They got used
to consuming more than they earned.
For a long time, Germans expected everything from the state. Traditionally,
the trade unions are very strong in Germany. As a result, the wages
are relatively high. This is the reason why many companies invest
in other countries and not in Germany; it also explains why firms
from abroad are reluctant to invest in Germany – especially in the
eastern part. Virtually all major German companies are setting up
plants abroad in order to produce at low costs.
Many mid-sized German firms cannot cope with international competition
because of high production costs in Germany and also because of
the overwhelming bureaucracy. Bankruptcies last year reached a new
record. In 2003, nearly 40,000 companies folded, among them famous
names like “Grundig” or “IG Farben”.
Some figures help explain this negative development. The hourly
cost of labour in the manufacturing industry in Germany, including
wages, social security and pension contributions, is 13 % higher
than in America, 43 % higher than in Britain and 59 % higher than
in Spain, not to mention eastern European countries where the wages
are very low.
In stark contrast to the image of the hard-working German, nowhere
in the world can you find people who work less than in Germany.
Normally they work 37.5 hours a week and they have about six weeks
of holidays a year, not to count the many public holidays. Trade
unions argue that the working hours should be further reduced in
order to get more people to have jobs. As it stands today, the German
working hour is very expensive. People who loose their jobs are
instantly supported by the state. While many unemployed try hard
to find a new job, others prefer to be paid by the state and earn
some extra money working illegally. As a result, the shadow economy
in Germany is booming. The government plans to clamp down on what
we call “black labour” (“Schwarzarbeit” in German) by fining all
those who employ workers off-the-books. If these government plans
become law, the number of criminals would rise immediately, because
many households pay cleaning staff and other domestic services under
the table. They do this for a simple reason: to evade high taxes.
One major reason for today’s problems has to do with Germany’s
reunification. I do not wish to be misunderstood: most Germans are
happy about this good fortune of history. But after years of communist
rule the East German economy at the time of unification in 1990
was in very poor shape. To help the East develop, the government
every year shelves out some 100 billion dollars. This program to
reconstruct Eastern Germany is, beyond doubt, the biggest investment
program in history. At the same time, this assistance for the East
is one main cause of a growing fiscal deficit, which reached 85
billion euro or 4 % of the GNP last year.
Most economists and business leaders say that what Germany needs
today is a revitalizing dose of the type of free-market medicine
prescribed for Britain by Margaret Thatcher in the 1980s. In practical
terms that would mean: liberalize Germany’s highly regulated labour
market, abandon subsidies that make unemployment almost as lucrative
as working, and reform the bloated public health care system. According
to economists, reforms in these areas of the welfare state are necessary
so that Germany may recapture the dynamisms that made it Europe’s
economic engine for much of the post-World War II era.
The need to reform the welfare state is more or less undisputed.
But how to go about this and who should be responsible for this
process was the major issue of domestic politics for many months.
Until last December it seemed that Germany was not yet ready for
reforms. The constitutional system of balance of powers produced
a stalemate of powers.
A week before Christmas, the governing coalition of Social Democrats
and the Green Party and the opposition parties managed to agree
through negotiations to pass important reform bills. While all sides
knew that the compromise reached was not sufficient, at least a
beginning had been made.
The new legislation will shake up much of what has been sacred
to Germans over the past 50 years. Comfortable unemployment benefits
will be cut down to 12 months from 36. The rules forcing the jobless
to look for work will be radically toughened. Welfare entitlements
will be cut; those on the dole will no longer be able to reject
a job offer as “unsuitable” and retain their full unemployment benefits.
Also before Christmas, the German Parliament and the Bundesrat (the
Upper House) agreed to cut back on public-health spending which
has spiralled out of control.
There is criticism and praise for these measures, depending on
who you ask. At the same time there is agreement that Germany has
become a different republic.
In terms of economy, undoubtedly something has undoubtedly changed
for the better at the beginning of this year. Recent forecasts have
become more and more optimistic. They reflect the increasing optimism
among firms and financial markets that things will improve in 2004.
There are strong indications that the global economy is picking
up speed. While prospects of foreign demand look promising, domestic
demand is still the main weakness of the German economy. German
households lack the confidence to consume. Economists argue that
only when the confidence is restored will economic upturn occur.
One of the main parts of the reform package is tax cuts. There
is a neverending debate in Germany about further tax reductions
and about how to simplify a very complicated system of taxation.
Also in this regard, there has been some progress. With this in
mind, Chancellor Schröder said that the so-called “German disease”
(the media’s description of Germany’s supposed inability to pass
reforms) belongs to the past. He also said that labour market reform,
the restructuring of the social security systems, and more liberal
labour laws that include the freedom of small companies (with less
than ten employees) to hire and fire would once again make Germany
interesting for investors.
Allow me, at the end of my presentation, to add some remarks regarding
political reforms. I had actually planned to say much more about
domestic and also foreign politics in Germany, but Dr. Meinardus
asked me to shorten my presentation. Maybe we will have some time
in the open forum to tackle these matters.
Like in other democracies, in Germany confidence in politics is
diminishing dramatically. Many people simply don’t believe the parties
are able to solve their problems. Many others don’t vote, although
the percentage of voters is still high compared to other countries
like the USA. Many citizens are confused by the endless discussions
on reforms. Today you must be an expert to understand the different
proposals of the parties concerning taxes, the health system and
the social security systems. Politics has become very complicated
and technical and people expect simple answers.
Politics in Germany is so complicated because of its highly elaborated
welfare system and the democratic system of checks and balances.
Most laws need a majority in both houses of parliament, in the Bundestag
and the Bundesrat. The Bundesrat is composed of representatives
of the sixteen German states or “Länder”, to use the German
term. The Federal Parliament (or Bundestag) is elected for four
years. The parliaments of the 16 states are elected for four- or
five-year periods. Besides the elections on the national and the
Länder-level, we still have local or municipal elections. So
we really have an inflation of elections that – unlike the situation
in the Philippines – are held at very different times. For all practical
purposes that means neverending election campaigning. And that means
more political talk than political action!
In 2004 there will be no less than 14 elections in Germany. In a
year like this with 14 elections there are limited chances for further
reforms. Reforms tend to hurt the vested interests of at least some
people and the parties fear that they would be punished by the voters.
Politically, this explains why Germany has had – and continues to
have – difficulties in pushing ahead with drastic political, economic
and social reforms.
Reforming a Welfare State—Germans learn that this is even harder
than building a Welfare State. With this task Germans are not at
the end but just at the beginning.