Sat, Sep 02, 2006 - Page 9 News List

Germany is stagnating, politically and economically

Voters are unwilling to back major reforms because a large number of them would feel the pinch -- 41 percent benefit from some form of government assistance

By Hans-werner Sinn

A year ago, German Chancellor Angela Merkel was in the final phase of her election campaign. The incumbent, Gerhard Schroeder, lagged so far behind her Christian Democrats (CDU) in public opinion polls that she thought she would win a landslide victory and could therefore afford to expound the cruelties of the liberal austerity program delineated in her electoral campaign. She even announced a value-added tax increase (which her new government has, indeed, decided to implement next year).

But German voters did not appreciate her honesty. When she named the law professor Paul Kirchhoff, who advocated a flat tax, as her candidate for finance minister, Merkel's electoral cakewalk turned into a nightmare. She lost nearly her entire lead, and in the end won by only a tiny margin -- a margin too small to form her preferred coalition with the liberal Free Democrats.

Instead, she had to form a coalition with Schroeder's Social Democrats (SPD), though without Schroeder himself.

Merkel's first year of government will soon be over. It has been successful in terms of international relations. She won the respect of her EU partners and managed to salve Germany's damaged relationship with the US. Her unpretentious manner and intellectual capacity (she holds a doctorate in physics) quickly won her the respect of many, even of Russian President Vladimir Putin, whose language she speaks fluently.

However, Merkel has disappointed everyone who hoped that she would continue and even expand Schroder's domestic economic reform agenda. While her party program speaks of opening union contracts, relaxing job protection, and, in particular, overhauling the incentive structure of the welfare system, her government has been mostly silent about these issues. The cautious steps toward wage subsidies that her government has taken are mere window dressing and cannot be taken seriously.

Thus, Merkel has so far dampened any hope that the important and hard reforms that she announced during her campaign and that Germany urgently needs will be carried out under the CDU-SPD "grand coalition" government. To be sure, she has put healthcare reform and a reform of company taxation on the agenda, but the plans presented so far give no indication of a major breakthrough.

This stagnation in policymaking has been heavily criticized by the media and the influential Wirtschaftsrat (Economic Council), an association of entrepreneurs who sympathize with the CDU. Even Germany's Christian Democratic president, Horst Kohler, has continually reminded the government of the need to press ahead with economic reforms in order to pave the way for sustainable growth.

So why does Merkel not dare more? Why is she not sticking to the announcements she made during her campaign?

The superficial answer is that her coalition partner, the SPD, is not willing to go further. But if this is the explanation, the next question is why the SPD is unwilling to continue Schroder's reform course.

Such questions lead to the real explanation of Germany's political stagnation: there is simply no popular majority in favor of liberal reforms, because in the near term such reforms would create too many losers. Germany's extensive welfare system spends 31 percent of the country's GDP for entitlement programs operated by the government sector. No less than 41 percent of the voting-age adult population lives primarily on government transfers such as state pensions, full-scale public stipends, unemployment benefits, disability benefits, and social assistance (in East Germany, the figure is a whopping 47 percent).

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