Accessibility links

Has the German Economic Miracle Run Its Course? - 2003-05-07

The world’s third largest economy is facing grim news nearly every day. High unemployment, low growth and bankruptcies plague the German economic landscape. The government says strict reform of the generous welfare system is the best way to jump-start the economy. But labor unions offer stiff resistance.

German Chancellor Gerhard Schroeder continues to have one of the toughest jobs in Europe. He is advocating sweeping changes in Germany’s sacred welfare state. That’s almost revolutionary in a country where the government has been taking care of its citizens for more than a century. In doing so, he is taking a big risk in confronting powerful labor unions that form the bedrock support of his Social Democratic party. He insists reforms are urgently needed and even hinted at resigning last week if they do not go through. But the labor unions remain unconvinced by his argument that reducing costs of social programs will create much-needed jobs.

Mr. Schroeder’s challenge was underscored by May Day demonstrations last week that turned violent. Dozens were injured during clashes between police and radical groups in Berlin and the northern city of Hamburg.

That same day he was interrupted by whistles and hecklers during a speech at a rally sponsored by the German unions.

Jeffrey Gedmin is Director of the Berlin office of the Aspen Institute, a US research organization that promotes dialogue on transatlantic foreign policy, defense and trade issues. He says Mr. Schroeder is facing a situation that his predecessor, former Chancellor Helmet Kohl, warned about years before. "Helmut Kohl was in power for 16 years and towards the end of his tenure, five years ago, he said that Germany has become sort of a collective amusement park," he says. "What he meant by that was a country that had lived very well for perhaps too long, with ever longer vacations and ever-shorter work weeks, greater demands from the unions and less response to the competition of the so-called global economy. That’s what Helmut Kohl left for Gerhard Schroeder. Five years later, Gerhard Schroeder has not been able to turn that fundamental economic culture around yet."

But Chancellor Schroeder’s proposed reforms are taking that culture head on. They would make it easier for companies to fire employees and would cut unemployment benefits. Nearly five million Germans are out of work and all receive ample stipends from the government. Germans may have to work longer and for more years before they could retire. He also advocates changes in the health care system.

Germany, like Japan, lifted itself out of the ashes of the Second World War and achieved a high level of growth. Sweeping free market reforms helped post-war West Germany became a powerhouse world economy in what was called the Wirtschaft Wunder -- or economic miracle.

But in the last decade, Germany’s growth petered out. Soaring labor costs, an aging workforce and foreign competition have all pulled the economy down.

Many Germans, including Michaela Vay, believe the economic miracle could be over. She lives in Frankfurt, a financial hub that played a major role in former West Germany’s economic success. She imports exotic Southeast Asian goods but laments that these days people come to her shop only to look, not to buy. "I think people are afraid this year will be worse then last year," she says. "That means that everyone is just feeling they could lose his or her job. Before I just read in the news that we have a lot of unemployed people, but now I have at least two friends who are looking for a job. The time is over for the Germans to have real good times. I’m born in 1962 and I had the best times ever. I never had problem with jobs or with money. The last generation, those born in the 1950’s had growth all the time, and now it seems the economy is coming down. This is something that Germans cannot except. It just seems they are in a big depression. It is a psychological thing."

The Aspen Institute’s Jeffery Gedmin says that human nature is perhaps the largest obstacle to painful reforms. "It's very hard for anybody, and certainly for Germans, to take back what’s been given," he says. "Imagine if you become addicted to ever increasing growth, ever increasing and longer vacations, ever shorter work weeks and and and . And then someone comes along and says we have to work a little harder and vacation a little less, have a little less stability. We might have to liberalize the possibility for employers to fire people."

Analysts say there is another significant reason for Germany’s economic plight. Germany faced a challenge that no other mega economy has ever taken on in recent history: absorbing a much poorer next door neighbor. In one historic swoop in 1990, West Germany absorbed East Germany – a country cloaked in communism -- the antithesis of a western free-market democracy.

Dieter Dettke is executive director of the Friedrich Ebert Foundation – a German political organization promoting transatlantic dialogue. He says re-unification was an extraordinary endeavor…and an expensive one. "Add one fourth of people and economy to Germany and our standard of living drops because you inherit a much weaker economy," he says. "German unification was financed practically by putting an additional burden on labor costs because of the way our welfare system is financed. It is contribution based -- workers pay into the system, employers pay into the system."

Mr. Dettke says Germany has been overwhelmed by the much higher than anticipated cost of absorbing less productive former East Germany. The total cost is a whopping 80 billion Euros a year. "After the Second World War, the Marshall plan gave 12 billion dollars to Europe," he says. "Now multiply by the inflation rate since 1948, which is about 100 percent, and you are talking about 100 billion dollars. That is the dimension of how much we pay every year into East Germany, for 17 million East Germans. That’s what it costs: a Marshall plan every year."

New apartments, restored historic buildings and modern German roads or Autobahns now dot the East German landscape. Even humble village lanes are paved with the latest Autobahn asphalt. But they remain largely empty as trade has dwindled. In fact, these days the roads are used mostly by former East Germans flocking to the West because of a lack of job opportunities.

Frances Streipert grew up in the former East Germany near the city of Jena and now studies architecture in the United Kingdom. She says many of her friends work or study abroad. "The work possibilities are very limited," she says. "There are loads of my old classmates who work in the West. Some are still in close proximity to where they come from, just over the other side really. So they can travel back home."

Frances was only 12 years old when the Berlin wall crumbled. She says her new freedom is a blessing. Although she enjoys living in Britain, she hopes to go back to help rebuild former East Germany. "I think Germany belongs together and should not have this artificial split," she says. "Although I felt very happy in East Germany, it was probably because I was young back then. I think people in Berlin, for example, were much more exposed to the division than I was. Now I can experience the whole world, and that’s really inspiring. I find it really useful to break out of these borders and meet other people and talk to them about things that I wasn’t able to before."

Jeff Gedmin of the Aspen institute believes that despite tough economic times and the added burden of unification, former east Germans are far better off than before. "It has been a positive experience, and we can never forget that in context of what the East Germans had before," he says. "They had barbed wire. They had guard towers. They had attack dogs, and they had a central command economy that failed in most major areas of production in providing for the needs of its citizens. East Germans are free, and they were not free before. I don’t think we can ever overlook that, and I think that most Eastern and Western Germans would see it that way."

Michaela Vay of Frankfurt believes her country has a responsibility to help former East Germans, although it will take time. "We still say the Easties and they say the Westies," she says. "So it still seems there is no common Germany in the minds of the people."

Recent surveys of Germans from both East and West show a striking number of people believe something must be done about the economy. Chancellor Schroeder is determined to press ahead with his controversial reforms. Georgetown University professor Holger Wolf says these will not undermine the welfare system but reduce the unsustainable financial demands on it. What happens to the German economy, he adds, will have an impact on the future of the European Union and ultimately the global economy.