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March 12, 2003

The German Puzzle
by Hans F. Sennholz

Ever since the years of reconstruction after World War II Germans probably have been the most pro-American people in Europe. There is deep admiration of the American political and social order and great respect for American wealth and military power which, in their judgment, was the paramount force that overwhelmed the Nazi dominion. After the War the United States was the sole protector and deterrent to a Soviet-communist sweep across Europe and, upon the Evil Empire's disintegration, it readily supported German unification. Many Germans gratefully remember the past.

While millions of people are demonstrating world-wide against a war with Iraq, Germans are bitterly divided on the issue. Both major political parties, the Social Democrats and the Christian Democrats, have come out firmly against the war. Yet, many dissenters favor both military intervention and German participation in the confrontation, if peaceful means to disarm Iraq should fail.

The official German position must be viewed in the light of politics which is a simple strife of party interests masquerading as a contest of principles. During last Fall's election campaign Chancellor Schröder cleverly distracted the electorate from economic stagnation and rising unemployment by posturing as the righteous advocate of international peace and harmony. He managed to win a slim victory over an inept opponent. Since then his position and popularity have fallen precipitously as economic conditions have deteriorated further. Many Germans now view the situation as hopeless, which leaves them either depressed or outrightly cynical about their country. The hopelessness finds expression in their endless talk and prattle about the need of reform which, in their world of thought, consists of a long list of painful and unacceptable alternatives. All the reforms they envision call for personal sacrifices for the benefit of others.

In a welfare society, such as the German, where the benefits and burdens are the result of lengthy and bitter political struggles between various pressure groups and social classes, change has many enemies. Industrial unions and business associations have the legal right to set industry-wide wages, but they have no responsibility for the unemployment they create. The workers they cast off depend on the generosity of the welfare state. Labor law and jurisdiction protect employed workers from their employers but utterly ignore the unemployed. Sadly, many Germans now are convinced that, on their own, they are no longer able to agree upon and carry out a reform.

To foreign economists the German dilemma is rather simple and clear: a crushing burden of welfare expenses and regulations is dispiriting the working population and depressing economic activity. Several layers of government are draining approximately one-half of national income and regulating the rest. It is not surprising that much German business capital is running and hiding from government agents and tax collectors, seeking survival abroad. A heavy blanket of social legislation and taxation is smothering the labor market. It reduces the gross wage of an average German worker by 58 percent, consisting of social security plus income taxes; a single person loses 67 percent. The exactions not only increase the government share of gross national product but also further limit individual decision-making. Political authority and know-how prevail throughout the economy.

The German malaise has been growing ever since the socialists of old, now called the Social Democratic Party, came to power in 1968. Taking advantage of the economic "miracle" of recovery and reconstruction, which had sprung from unprecedented economic freedom soon after the War, they immediately returned to their old habits and mores, the political redistribution of income and wealth. They fervently supervised, guided, controlled, and directed economic life until the economy sank into deep recession. By 1982 industrial output was stagnating, budget deficits were soaring, and unemployment reached a 30-year high of some ten percent. Sadly, in just fourteen years in power the socialists claiming to represent the working people managed to turn the "miracle economy" into an ailing economy that deprived more than two million workers of employment.

In October, 1982, the Christian Democratic Party returned to power with Helmut Kohl replacing Chancellor Helmut Schmidt. In opposition they had opposed much harmful government intervention; in control again, they soon fell prey to the temptations of power. Ever fearful of the socialistic opposition, the Christian Democrats learned to compromise, give and take, go halfway, which invited new demands, new compromises, more demands, and more compromises until both parties were barely distinguishable but for their names. In 1982, the last year of Social Democratic administration, federal spending had soared to DM 258.8 billion; in 1998, the last year of the Kohl Administration, it exceeded DM 1.67 trillion. During Kohl's reign the federal debt rose from DM 317 billion to more than a trillion. When Kohl assumed the office the rate of unemployment hovered about ten percent; when he left it exceeded eleven percent, in East Germany, even twenty percent.

The economic blunders of the Kohl Administration during the 1980s were eclipsed by the gigantic mismanagement of the reunification of West and East Germany after 1989. In essence, the Federal Republic of Germany bought the German Democratic Republic and has been paying its citizens ever since. Year after year West Germany has been transferring double-digit billion D-Mark amounts to the new states. During the 1990s the German government spent about 10 billion U.S. dollars or some $11,000 for every man, woman, and child in Germany. Never in history has any region been subsidized so generously and continually as formerly communist East Germany.

When federal, state, and city governments were virtually bankrupt and unemployment throughout Germany reached a rate of 11.6 percent in 1998, German voters abandoned the Christian Democrats en masse and reelected the Social Democrats, the very architects of the German welfare state, together with a new minority party of environmentalists called the "Greens". The Red-Green coalition, as it is nicknamed, advocated an austerity package but immediately faced not only a die-hard opposition within its own ranks but also the vocal critique of many Christian Democrats. Yet, it managed to lower the top income tax bracket from 51 percent to 42 percent; in order to appease the Greens in their midst, it raised the taxes on gasoline. Ever faithful to its tradition, it boosted sick pay, increased worker protection against layoffs, and strengthened labor unions' role in corporate management. It did shy away from a reform of the pension system which presently is supporting 47 retirees for every 100 workers. Facing a rapidly aging population, the system envisions 104 retirees for every 100 workers in 2050.

In 2002 the Red-Green coalition started its second term as badly as it finished the first. As the economy continued to stagnate and tax revenues decline, the Red-Green administration sought to close the fiscal hole through boosts of the income tax, new levies on inheritance, higher capital gains taxes, and new taxes on equities. Soaring health and pension deficits are to be met with increases in employer contributions. Politicians still talk about the need for reform but there is little courage, deter- mination, and skill to press ahead. Three-quarters of the Red-Green coalition in the Bundestag are members or officials of labor unions; no political leader has the courage to fend them off.

Germany will soon be the center of a 25-member European Union, its biggest member with 82 million people, generating a fifth of its gross national product. In ages past, her neighbors often feared her power and might. Today she is a stricken giant, the sick patient of Europe, pitied rather than feared. Her government recently suffered the indignity of receiving formal reprimands from the European Commission for running a budget deficit of 3.8 percent of GDP, exceeding the 3 percent limit under Union rules. German weakness is burdening the Union and casting a dark shadow on the European currency. Reacting to foreign criticism, the Schröder government may blame the poor showing on the approaching Iraqi conflict or the rising Euro currency which places German exports at a disadvantage. It is quick to point to the European Central Bank for its lack of monetary stimulation lowering interest rates and thereby stimulating business and consumer spending. It would love to see the currency depreciate, which would lower the real cost of labor and thus hopefully reduce the unemployment.

Foreign observers of the political and economic situation in Germany may despair about her future. As far as they can see they glimpse a welfare state that produces ever more government exactions, regulations, and restraints. They see a comprehensive system of political command, direction, dominion, authority, jurisdiction, supervision, and charge. When an industry ceases to function satisfactorily the government promptly tightens its grip and subsidizes the loser. With the healthcare industry in loss and disorder, for instance, the reformers are contemplating lowering drug prices by decree and freezing payments to doctors by edict. Resisters and violators among druggists and doctors would be prosecuted. When an important industry suffers painful losses but is unable to readjust under the blanket of commandments it can always rely on subsidies. They are a large item in the federal budget, presently amounting to 156 billion euros (approximately $170 billion) per year or some 7.5 of GNP and 35 percent of tax revenue. They are specifically designed to prevent painful readjustments and keep old maladjusted industries alive.

Both political parties are ever eager to assist the feeble. They are unaware that often we can help each other most by leaving each other alone. It may be more charitable to leave an old industry alone than to assist and encourage it in its losing ways, which merely prolongs the suffering. Standing ever ready to interfere with a readjustment process, the politicians of both parties actually may be guided by old notions and doctrines. While they may wax eloquent about their great concern and compassion, yea, even Christian charity, they actually may espouse socialistic theories of labor exploitation and class warfare. There are few voices that answer them and hold forth on the virtues and benefits of individual freedom and the private- property order.

Germany needs much more than a reform; it is in urgent need of a new economic miracle, a reformation that liberates, emancipates, releases, discharges, and unleashes the people. Liberty is never out of sight or out of bounds; it reappears wherever man longs to be free.

Hans F. Sennholz
www.sennholz.com

Copyright © 2002-2007 Hans F. Sennholz

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