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Journalist Points at Inflexibility as Cause of German Economic Woes - 2004-03-03


A new book published in Germany is highly critical of that country's social market economic model, arguing that the generous social welfare system has become unaffordable and hampers both job creation and economic growth.

Journalist Olaf Gersemann argues that the German economy needs to be more flexible and entrepreneurial. In his book, Germany's Misguided Fear of Cowboy Capitalism, Mr. Gersemann identifies high taxes, generous unemployment benefits, and the difficulty of hiring and firing workers as principal factors inhibiting economic growth. He says Germany's generous social security system can't be sustained because there aren't enough people paying into the system.

"We have to tell the people now that you can't expect really to get 80 percent of your old age income from the government or the social security system and that you have to start saving right now on your own," he said. "Otherwise, this will be a big time bomb for [Germany] and most European countries."

In the United States, private pensions - usually from an employer and also individual savings - comprise a bigger percentage of old-age income than social security payments from the government.

Mr. Gersemann has for five years been the Washington correspondent of the German magazine Economic Weekly. He says labor force rigidities are the main reason that while the United States created 20 million jobs in the 1990s there was virtually no job growth in the 15 European Union countries.

"Take eastern Germany and western Germany, which were reunified in 1990," he said. "In the combined country there was actually a net job loss in the 1990s. So we now have fewer jobs than we had back when the country was unified, plus [further constraining growth] there is a much shorter work week than there was ten or 12 years ago.

Mr. Gersemann says Europe must reform its labor market if it is to effectively compete in a globalized economy. He says Germany should also adopt other reforms, including abolishing free university education, mainly, because it is unfair. In the current system, he says, lower income people - through their taxes - subsidize the higher education of middle and upper income people.