For much of its post-World War II history, Germany was a beacon of prosperity and political stability. Now its economy is stagnating, and social harmony has given way to acrimony and division.
Germany’s grossly unequal distribution of wealth is an underappreciated cause of this malaise: The top 10 percent of households have at least 725,000 euros (US$793,000) of net assets and control more than half of the country’s wealth, while the bottom 40 percent of households have at most 44,000 euros of net assets, a Bundesbank survey showed.
Together with a pervasive sense that Germany is coming unstuck — think creaking infrastructure, inflation and the loss of cheap Russian gas — economic precarity makes Germans susceptible to fringe arguments that their living standards are threatened and the government is out of touch. In the long term, Europe’s biggest economy must reform its labor-penalizing tax system and promote a broader distribution of capital.
Irate farmers have blocked roads nationwide in recent days, ostensibly to protest agricultural subsidy cuts. They have been joined by supporters of the far-right Alternative for Germany (AfD), which blames the country’s welcome of migrants for its fiscal and economic woes. Almost one-quarter of the population say they would vote AfD if an election were held today — and depressingly, I do not rule out that figure increasing before next year’s national vote.
The federal government is in disarray, having been forced last month to find 17 billion euros of savings in this year’s budget following a constitutional court ruling that its attempt to repurpose unused pandemic funds for climate investments was illegal.
Reconciling the Free Democrats’ anti-borrowing philosophy with the Social Democrats’ commitment to welfare spending and the Greens’ determination to promote decarbonization has led to bickering and compromises that satisfy almost nobody.
Gallows bearing the traffic light symbol of the three-party coalition have appeared at roadsides and German Minister for Economic Affairs and Climate Action Robert Habeck was blocked from leaving a ferry by an angry crowd.
Echoing the vituperation of supporters of former US president Donald Trump and France’s yellow vests, and fanned by similar social media echo chambers and suspicion of mainstream media, this polarization is nevertheless shocking for a country that prides itself on cohesion and shared prosperity.
However, the shared prosperity bit is partly a myth: Inequality is high by European standards and median net wealth of about 106,000 euros is well below the euro-area median of about 150,000 euros.
Of course, there is an argument that Germans do not need a lot of money to live comfortably due to high-quality public services: Child daycare is free in some federal states, as is public university tuition. Lately, labor unions have won pay hikes, while savers have earned higher interest on bank deposits; farmers too have earned higher profits.
However, fewer than half of households own a home and hence have not benefited from soaring property prices — the median wealth of German tenant households is just 16,000 euros, the Bundesbank said.
Meanwhile, only about one in six Germans invest in the stock market. In 2019, German Chancellor Olaf Scholz, who was then finance minister, said that he kept all his money in a low-yielding bank account.
Although his admission might have won the sympathy of Germany’s cautious savers, it spoke volumes about the country’s self-defeating attitude toward investing.
Much of Germany’s wealth is held by private, family-owned small and medium-sized companies known as the Mittelstand. These are an engine of job creation, but their thrift underpins the current account surpluses Germany is often criticized for, contributing to inequality and suppressing domestic consumption, according to the IMF.
For a long time Germany’s booming exports and budget surpluses deflected from these shortcomings, but the weaknesses of its economic model have now become apparent. Output contracted by 0.3 percent last year, an official estimate published on Monday showed, and the economy might expand by just 0.3 percent this year, economists surveyed by Bloomberg said.
An aging population is also straining Germany’s generous social insurance system. Unless reformed, the proportion of the government budget spent on pensions could rise to more than half by 2050, compared with around one-quarter today.
French Minister of Finance Christian Lindner’s plan to augment the pay-as-you-go pension system with a debt-funded German sovereign wealth fund invested in global equities is not sufficient to close the gap in financing.
Germany’s increasingly fractious politics make me unoptimistic about the chances of further reform to reduce inequality and broaden asset ownership, but there is no shortage of good ideas.
The Organisation for Economic Co-operation and Development and leading German economists have long criticized the country’s tax system because the burden is skewed too much toward wages, while property and inheritance taxes are low.
There are sweeping inheritance tax exemptions for business owners, for example, on the grounds that jobs and investment might otherwise be endangered. These rules are far too cushy, and the upshot is taxes on large inheritances are often lower than a smaller bequest.
Broadening wealth need not mean taking it from the rich. Germans lack tax-efficient ways to invest in the stock market — there is no equivalent to the UK’s individual savings accounts or US 401ks and Roth IRAs, for example.
I am also in favor of a citizen’s inheritance — a cash distribution of, say, 20,000 euros to every young adult that could be reserved for specific expenses like acquiring property or paying for education. Not surprisingly, AfD politicians oppose the idea, because it might mean giving even more money to migrant children.
An irony of the AfD’s increasing support is that many of its low-income supporters would benefit little from its program, which includes opposing property, wealth and inheritance taxes. Helping more people share in the benefits of economic prosperity would go a long way toward neutering support for radical political parties and cooling the anger now boiling over in Germany.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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