Germany isn’t working

Whenever a government plans to raise taxes on cigarettes, smokers know that the whole nation is in trouble. This is certainly true for Germany. 110,000 Germans die of cigarette-induced cancer each year, according to official figures. But as the American tobacco industry once pointed out in a cynical analysis during one of its many class action suits, such cigarette-induced mortality rates are a boon to social security systems. In Germany, like the smokers, this system too is in deep trouble.

At the moment, Germany’s health minister Ulla Schmidt is planning a reform which will reduce by 2% the sum each working citizen pays for national health-insurance (at present almost 15% of salary). This would amount to savings of approximately €15 billion (euros); another €5 billion would come from the moribund smokers, who will have to pay more for each puff. A pack of cigarettes would then cost €4 instead of €3 euros. Since many Germans buy their cigarettes from vending machines, which have only recently been readjusted from Deutchmarks to euros, this would mean another boost to the vending machine producers – but not those who license them.

All this defines what is so difficult in Germany: every single and overdue move towards political reform carries incalculable and frequently damaging side-effects.

Missing the mark

At present, the whole nation seems to feel that its system is unraveling like an old sweater which had kept everybody warm for many decades. Nobody finds solace looking at the successful reforms of social systems in other European countries, particularly Sweden and Denmark. The latter, for example, has introduced an US-style hire-and-fire philosophy in the labour market, helping to reduce unemployment from 8% to 5%.

The Germans, however, are adverse to changes in their labour and health laws. They point out that Europeans still come to German hospitals for kidney transplants, heart surgery and the remedy of other ailments – remedies unavailable in the overcrowded health systems of (to name only two) Britain and Belgium. True, but their provision is highly expensive for the host country.

Germany is coming to grips with demographic change (a low reproduction rate and growing life expectancy), structural unemployment (at 4.5 million, the figure is at its highest for a decade) and an ever-growing budgetary deficit for 2003; the Social Democratic-Green coalition government needs to raise at least another €15 billion in September, thus missing by a wide margin the 3% deficit mark prescribed by the EU stability pact.

It is all reminiscent of watching a sleepy, overfed golden retriever (Germany’s favourite dog these days) lift itself from an expensive designer couch to go for a walk. Its limbs are somewhat entangled and it is raining outside.

The trade unions are furious – and out on a limb. Their opposition to this Social Democratic-led government is greater than to any of its predecessors. Gerhard Schröder, the Chancellor since October 1998, proposed his awkwardly named “Agenda 2010” in March 2003. This announced a number of semi-radical changes in the Germany’s unemployment benefit, social welfare and health systems. But will these reforms really reduce the cost of labour and introduce into the business world the flexibility needed to cope with the challenges and opportunities of digital capitalism? Probably not.

The costs of sclerosis

Schröder has miscalculated the resistance of the trade unions and the diehards of his own Social Democratic (SDP) party. While the majority of Germans support his reforms, they would, as individuals, prefer them to be applied not to themselves but to someone else. After a series of regional party conventions, Schröder is now in the middle of yet another election campaign – this time just to win over his own party.

While the opposition, conservative CDU welcomed the reforms, a small band of dissidents in the Bundestag have been threatening to block them. That, of course, was the wrong strategy. As an expert in martial arms – metaphorically speaking – Schröder converted the political threat to his own advantage and promised his resignation, if the party and its dissidents would not follow him. On 1 June, a special SPD party conference will certainly provide the Chancellor with the majority he needs.

His longer-term prospects are bleaker. The reform package may come too late for the next election in 2006 as well as for the country as a whole. Germany’s annual growth rate has sunk to less than 0.5%; according to economists it will have to reach more than 3% to reduce unemployment by a million. Even this calculation remains questionable, because a large portion of unemployed people have fallen victim to the growing demand for professional sophistication in new service-orientated industries. In the market as it stands, there is no work for them.

Many of Germany’s formerly competitive industrial sectors, especially pharmaceuticals, have lost out to international competition. While employers like to blame this on high wages, over-regulation and educational shortcomings, the melancholy truth is that Germany’s leading managers have been more efficient over the last two decades in mergers and acquisitions than in research and development.

Critics of Siemens are fond of pointing out that the company which invented the fax had a management that failed to understand its importance (Scrabble-enthusiasts know how quickly “Siemens” can become “Nemesis”). Yet under new leadership, Siemens has been able to reconstruct itself through diversification – exporting jobs to cheaper workplaces in India or China. Other big companies, especially in the construction business, have not.

The continuing transfer of €60 billion a year to the underdeveloped provinces of the former German Democratic Republic in the east adds to the government’s severe budgetary restraints and thus prohibits any kind of Keynesian intervention by the government to boost the economy. 70% of this sum goes straight into consumption – that is, into pensions and health care benefits to 15 million Germans who paid nothing towards any kind of insurance-system under the pre-1989 socialist system. The 1990 reunification still casts a long and dark shadow on the once bright and shining German economy.

The coalition government has made several efforts to salvage the economy and reverse their collapsing popularity. A first reform of the health care system passed parliament in 2000, yet costs kept on growing. In 2001 a tax reform was passed, limiting the top bracket of income taxes to 48.5% (42% by 2005). Numerous labour laws were passed between 1998 and 2003, intended to lower labour costs and add more flexibility to the market. All have been in vain.

A total renovation of the national unemployment offices (which employ over 150,000 people, and whose inefficiency is legendary) added to the confusion. It has not created new jobs yet and probably never will.

No shelter from the storm

Almost five years of government under Schröder have shown what had already become apparent during the years of Kohl’s rule: in the context of globalisation, the old means of stimulating a national economy through deficit spending are no longer available. The enormous international flow of money emphasises that economies do not shrink these days for want of cash. When consumers lose trust in their future, they just sit on their cash and wait – in Germany, as in Japan. In the meantime, the car industry sits on its new cars.

The European Stability Pact has helped make state intervention as a means of revivifying the economy even less feasible. Meanwhile, the whole country – like Europe as a whole – is over-regulated and in constant litigation with itself. There are per head of population six times as many professional judges in Germany as in Britain. Yet even lawyers are now feeling the sting of unemployment.

Many of the country’s leading managers predict a further downward economic spiral, which would – as Germany is still, despite its troubles, the biggest economy in Europe – have painful consequences for the rest of the continent. It is good to hear though, that at least some of them will not suffer. Josef Ackermann, chief executive officer of Deutsche Bank, has just declared an annual salary of €6.9 million. This is justified by the amount of money he “is responsible for”. Gerhard Schröder manages far greater sums, yet his annual income is €6.75 million smaller than Ackermann’s.

Beyond the horizon, social unrest – demonstrations, strikes and God knows what else – lurks. In the US, the average citizen aspires to be rich; in Germany, by contrast, all he wants is security. When even that is threatened, people look around, begin to compare their incomes, and grow into their fear.

As Aristotle’s Politics notes, this is the moment in democracies when troubles really start.