TCS Daily

Overcoming Germany's Oblomov Syndrome

By Hans H.J. Labohm - December 29, 2004 12:00 AM

The German economy, which once used to be the economic power house of Europe, is almost stagnant today. No doubt the country is still prosperous with an excellent infrastructure and a generous welfare system, which shields its citizens against material hardship in case of personal adversity. But economic growth is dismally low, while unemployment is alarmingly high and persistent, despite the government's declared commitment to halve unemployment in a few years time. Moreover, the public deficit is in excess of the maximum of 3% of GDP, laid down in the EU's Stability Pact. In the longer term the spectre of an ageing and shrinking population is looming on the horizon. In order to solve these problems and face the challenges ahead, Germany has to put its economic house in order.

So far Chancellor Schröder's new political and economic programme, which has been announced with much fanfare, with catchwords as 'Neue Mitte' (New Middle), and 'Bündniss für die Arbeit' (Alliance for Jobs), has been pretty unsuccessful. Of course, it should be recognised that Germany had to swallow the aftermath of the unification with a bankrupt East Germany. But that is only part of the problem. For many years already, Germany has been labouring under a reform jam ('Reformstau'). Despite a widely shared feeling that something has to be done to get the economy rolling again, attempts to turn the tide have failed so far.

Against this background it is fair to say that together with Japan, Germany belongs to the top notch of developed economies which seem to be well-nigh impervious to reform. In Japan this has partly been offset by superior work ethic and a highly developed sense of duty. Although these virtues were once the hallmarks of the German national character as well, one can hardly escape the feeling that they have gradually been fading away over the past decades.

Some analysts believe that Germany is suffering from an Oblomov syndrome, similar to the predicament of the main figure in the novel by Ivan Goncharov. Oblomov, a young, generous nobleman, seems incapable of making important decisions or undertaking any significant actions. Originally the book was considered a satire of Russian aristocrats that no longer played a useful part in society in mid-nineteenth century Russia. But subsequently Oblomov has become synonym for someone who exhibits the personality traits of sloth or inertia.

What makes Germany so resistant against reform? First of all there is the rather complex institutional setting in which decision-making is decentralised. It takes place on several levels, which makes it cumbersome and prone to paralysis and all sorts of derailment by special interest groups. The German government has to share its competences and resources with Germany's Federal Upper House ('Bundesrat'), the European Central Bank, the Constitutional Court ('Verfassungsgericht'), as well as the employers' federations and trade unions.

The central government is severely restricted in its macroeconomic policy. It has no say in the level of wages. This is reserved to the employers' federations and trade unions ('Tarifautonomie'). Monetary policy is now Europeanised, whereby the European Central Bank is in the driver's seat. Budgetary policy is constrained by the deficit limits prescribed by the EU's Stability Pact.

People who have not yet succeeded in parting themselves from outdated Keynesian thinking, and who still believe that macroeconomic policy can be effective to stimulate the economy, will undoubtedly deplore this lack of policy instruments. Other people (like me) might see it as a blessing in disguise, because it puts a break on profligacy. After all, more often than not, macroeconomic demand boosting proved to be counter-productive, also because it offered a convenient alibi for postponing or canceling structural reform.

In principle, the 'Bundesrat', in which the federal states ('Bundesländer') are represented, can block half of all legislation, particularly in the budgetary field. The composition of the 'Bundesrat' reflects the political preferences of voters in the federal states. Contrary to many other countries, there are always elections in some federal state. Consequently, Germany is engaged in a quasi-permanent election struggle. This means that the central government does not enjoy a period of 'grace' -- say four years, which is a normal period in many other countries -- in which it can take unpopular action, the positive results of which can be harvested at the end of its office. It must constantly pay heed to shifts in the Länder's electorate's political preferences as a yardstick for its own popular support. Unpopular measures taken at national level by the government coalition, will have an immediate adverse impact on the support of the voters for the government parties in the 'Länder'. And the grim truth is that voters shy away from political parties which display too much reform zeal, because they see this as a threat to their 'acquired rights' (conveniently ignoring that it requires a sound economy to uphold those 'rights'). Therefore, whatever its composition, the government has to compromise in order to bring about consensus. But this process does not deliver the goods in time, when drastic change is urgently called for.

In a number of cases also the Constitutional Court has acted as an obstacle for reform. Since the middle of the twentieth century, it has for instance nullified several bills in the field of tax policy, economic policy and labour market policy, because these were deemed to be incompatible with the constitution.

Western Europe governments, which want to push through fundamental reforms, seek political support from employers's federations and trade unions. (If you can't beat them, join them.) The left regards the trade unions as its natural partners. However, the flip side of this hobnobbing is that special interests within these groupings may block attempts to reach agreement on reforms.

In Germany both left and right are loath to do anything that may break the country's consensus culture, which had served Germany so well in the past. But it now seems to have turned from an asset into a liability, because it paralyses decision-making, thus perpetuating the sclerosis and rigidities which have crept into the system.

Despite all this, there seems to be some movement at last. The most important reform effort currently underway is spearheaded by the Hartz commission, named after its chairman, Peter Hartz, a top VW manager. In order to make the incentive structure more conducive to the promotion of employment, Hartz has come up with several batches of proposals. The earlier set of Hartz recommendations aimed at making job-seeking and job seekers more entrepreneurial, breathing new life into the Federal Jobs Agency, as well as encouraging part-time 'mini-jobs' and one-man firms ('Ich-AGs'). Inspired by the Netherlands model, in which the experience with temporal job agencies was very favourable in reducing unemployment, Hartz particularly wanted to make job placement more efficient and to encourage temporary and short-term work. The last batch of Hartz proposals, which was adopted July 2004, limits unemployment pay to the first year out of work, after which much lower and means-tested, social security benefits will be paid. These proposals have triggered massive demonstrations. But the government stood firm and did not yield.

Of course these are steps in the right direction. But it is only the beginning of a major overhaul of the German economy. To date the outlook still remains bleak. Nevertheless, there are also some bright spots in the overall picture. Despite the burden of regulation, inflexible labour laws, high wages and social costs, a major part of the German industry is still miraculously competitive. This indicates a wide gap between the microeconomic efficiency of business and the weaknesses of the macroeconomic framework conditions.

Notwithstanding the hostile economic environment, German entrepreneurial spirit and zeal have until now succeeded in averting outright economic disaster. Therefore, German entrepreneurs are the unsung heroes today. It is most unfortunate that, over the years, their repeated warnings have been falling on deaf ears with German politics and trade unions. It is high time that these will begin to heed the needs of business and industry. If not, Germany's economic imbroglio will continue to haunt Europe for many years to come.


TCS Daily Archives