Germany’s economic woes

Every time I come to Germany I become increasingly disgruntled at the economic incompetence of its leaders. Mind you, many of my criticisms apply not only to Germany, but to most of Western Europe excluding the UK. Of particular concern to me at the moment is a series of reforms of the German health system being proposed, which will require a massive injection of federal funding, with estimates ranging from 20 billion to 45 billion Euros. To finance this a multitude of different tax hikes are being promoted, including income, company and capital gains tax increases. At a time when Germany is running large budget deficits (to the point where it is violating EU budgetary requirements), unemployment rates are in the vicinity of 11% on average and 17% in the former East, economic growth is almost flat (around 1-1.5% and amongst the weakest in the EU), and taxes have already recently been raised (via a 3% VAT increase), is increasing government spending and hiking taxes really an even mildly sensible thing to do? It seems that even Germany’s leaders acknowledge how bad things have become with Chancellor Angela Merkel recently controversially proclaiming that Germany is “an economic basket case”. My question then is “Why the hell don’t you bloody well do something about it you so-called conservative? You’re the Chancellor aren’t you?”. Of course, it’s not completely fair for me to blame poor old ex-fellow-physicist Angela for all this. Politicians sometimes inevitably have to give in to social pressures, and in Germany there are immense social pressures against free-market reforms and in favour of the traditional European welfare state. Society would prefer ‘social justice’ over economic progress. My view on this differs somewhat. In my mind there’s nothing more socially unjust than having 11% of the working-age population out of work, and next to no economic growth, regardless of how much social security you pay them. All this does is deprive people of future prosperity, job prospects and social services. It’s all very well to spend money on social services, but one mustn’t forget that, in the long term, such spending cannot be funded without a strong economy.

5 thoughts on “Germany’s economic woes”

  1. Well, here is something on Sweden:

    One should not use excamples selectively to make a point. What about Sweden for instance, with a social democratic government for many years, high taxes (although corporate taxes are low: 28%) and and a very well developed social security system?

    Bureau of European and Eurasian Affairs
    August 2005

    “Annual growth rate 3.6% (2004)

    The Social Democratic Party has a base of blue-collar workers, intellectuals, and public sector employees. It derives much of its power from strong links with the National Swedish Confederation of Trade Unions (LO), which represents around 90% of Sweden’s blue-collar workers. The party program combines a commitment to social welfare programs and government direction of the economy.

    In contrast with most other European countries, Sweden maintained an unemployment rate around 2% or 3% of the work force throughout the 1980s. However with high and accelerating inflation at this time, it became evident that such low rates were not sustainable, and in the severe crisis in the early 1990s the unemployment rate increased to more than 8%. Unemployment held steady in recent years at about 5%. It was 5.5% for 2004, but job creation remains a stubborn problem. As of June 2005 the unemployment rate was 7.1%.

    Eighty percent of the Swedish labor force is unionized. For most unions there is a counterpart employer’s organization for businesses. The unions and employer organizations are independent of both the government and political parties, although the largest federation of unions, the National Swedish Confederation of Trade Unions (LO), always has been linked to the largest political party, the Social Democrats.

    There is no fixed minimum wage by legislation. Instead, wages are set by collective bargaining.”

    4.8% official unemployment rate in Mat 2006 (AFP). However, real unemployment is greater, depending on what criteria are used, and this applies to other countries as well, in particular the USA where real unemployment rates are vastly greater than the official;l ones.

  2. Here are some other European countries with low official y=unemployment rates: Austria 4.5, Netherlands 4.7, Luxamburg 4.4, Cyprus 5.6, Ireland 4.3, Denmark 5.1

    The following extract from the Economist shows how careful one has to be when trying to export economic models to other countries.

    The Economist January 19 2006

    Denmark’s flexicurity model: ready for export?

    Some European politicians are turning to the Danish ‘flexicurity model’ – a combination of easy hiring and firing, generous unemployment benefits and an active labour market policy – in an attempt to reinvigorate their sluggish labour market. This week French PM Dominique de Villepin, for example, announced measures to boost youth employment that seem to have been inspired by the ‘flexicurity’ model.

    But if it’s such a great system, why haven’t other European countries adopted it already? After all, the model has been around for over a decade and has been actively touted by the European Commission. Two French labour economists, Yann Algan and Pierre Cahuc, attempt to explain this puzzle. In a new IZA discussion paper, Civic attitudes and the design of labor market institutions: Which countries can implement the Danish flexicurity model?, they argue that the generous unemployment benefits that form part of the Danish model can only work in a high-trust society where few cheat the system:

    We argue that the flexicurity model is hardly sustainable in countries displaying weak public-spiritedness because the unemployment insurance design raises moral hazard issues that are much more difficult to overcome in countries where individuals are more prone to cheat over government benefits.

    Besides, we are also able to document that civic attitudes cannot be systematically changed quickly just by changing institutions. This result has far-reaching consequences for the policy reforms agenda. It indicates that civic attitudes impose real constraints on the choice of labor market institutions. From this point of view, it is unlikely that countries with weak public-spiritedness can implement the Danish Model without specific action aimed at changing the values of their citizens.

    …this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

    France is not such a country. The authors demonstrate that it has a much less generous unemployment benefit system than the Danes, and the French are much more accepting towards welfare cheating. On that evidence no sane French politician would want to import the flexicurity model. The authors conclude:

    …this analysis suggests that public-spiritedness is a key ingredient in the possibility for a society to implement efficient public unemployment insurance. To that regard, a country may be unlikely to succeed in its labor market reforms without a comprehensive policy affecting civic behavior of its citizens.

    This is an interesting proposition. While it doesn’t wholly resolve the policy question, it takes us some of the way there. It also helps answer the vexed debate over whether the Nordic model is exportable.

  3. Comparing unemployment rates in the Nordic countries to other Western nations like Australia and the US is completely misleading, on the basis of the way it is calculated – that is, the way ‘unemployed’ is defined. This results is welfare states have comparatively low official unemployment rates, since many forms of welfare do not categorize people as being unemployed. Several examples that I’m aware of follow:

    In Finland, parents are entitled to up to 3 years paid, salary indexed maternity leave. Since this is ‘leave’, it does not enter unemployment statistics, yet is a very significant factor in labour market participation.
    In most Western European nations, students finish studies at a MUCH later age. Again, this does not enter unemployment statistics, but massively reduces real labour market participation rates.
    In Sweden, the government has State sponsored education programs for unemployed people. These people do not enter unemployment statistics.

    In summary, many independent sources (do a Google search to verify this) indicate that ‘real’ unemployment rates are many times higher than official ones. Having said this, inconsistencies between ‘real’ and ‘official’ employment statistics apply to virtually every country. But, the discrepancy tends to be far greater in the ‘welfare states’, on the basis that State-run programs are conventiently used to hide true labour market participation rates.

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