NCPA - National Center for Policy Analysis

Ich Bin "Broke"

March 15, 2004

Despite enjoying an economic surge in the early nineties after reunification, Germany has struggled for the better part of the last decade. Today, it has gotten so bad that, according to the New York Times, when Germany's statistics are not included, the oft-maligned economy of the European Union (EU) is doing about as well as the United States. This is of particular concern for the EU given that a host of poorer nations are poised to join the economic trading block in the near future.

The reasons for its troubles are not hard to identify. Germany has a lavish welfare state that it can no longer afford. Also, it has a rigid labor market that, along with high labor costs, have forced many businesses to move elsewhere. The results to Germany's economy have been staggering:

  • Last year, the German economy shrunk 0.1 percent and is projected to grow only slightly by 1.5 percent this year.
  • As a percentage of gross domestic product (GDP), social spending in Germany ranks second in the Organization for Economic Cooperation and Development (OECD) -- in 2001, about 54 percent of all government spending was attributable to social welfare.
  • Unemployment has reached 10.3 percent, up from an already worrisome 7.9 percent in 2001.

Though Germany realizes that large reforms are necessary, so far it has shown no willingness to accept the consequences necessary to bring them about. For instance, Chancellor Gerhard Schroder had to step down as party leader due to the outcry arising from his call to charge a quarterly fee of 10 Euros to pay for health care expenses -- not exactly major welfare reform.

The New York Times concludes that far broader reforms are required for it to regain the economic vitality that created postwar miracle of years past. Ultimately, Germany's entire economic apparatus needs to be overhauled, including the antiquated system of centralized wage-bargaining, the Byzantine tax system, and the bloated budget.

Source: Editorial, "The Trouble With Germany," New York Times, March 10, 2004.


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