Reforming a Welfare State: How Germany is Coping with Globalisation
A speech presented by Mr. Dieter Jepsen-Föge, 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.

The 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 years.

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 year.)

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,” criticize globalisation.

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.