TCS Daily

Angie in Wonderland

By Nico Wirtz - January 10, 2006 12:00 AM

In her first New Year's address to her fellow countrymen-and-women German chancellor Angela Merkel outlined her new year's resolution for Germany: Reclaim the country's top economic position in Europe within the next decade.

In taking on this project, the new chancellor would make good on her campaign rhetoric. Yet, roughly six weeks after her inauguration, it remains unclear just how Germany ought to reclaim a leading economic position. Signs of a well-founded optimism -- despite lofty claims to overhaul labor laws, the rigid tax code, and Germany's prolific welfare programs -- are rare.

On New Year's Eve, Chancellor Merkel appealed to Germans to come together and work to overcome the political and economic status quo which has plagued the country for years. What sounds like a promising proposition, turns out to be something of a smoke-screen. Germany's new government is still lacking a clear vision and framework that positions the country in the socio-economic realities of the 21st century.

When listening to her speech, it sounds like Angela Merkel has found her silver bullet in the vague concepts of "courage" and "humanity". However, particularly the "courage" component is blatantly missing in the new government's political philosophy. Merkel is convinced that by positioning her government at the political center, between a free market economy and social utopia, she can steer the country into some kind of political and economic Wonderland. What lies between both of these poles is the "European (German) Social Model". It is the preservation of this very model Mrs. Merkel had in mind when she promised to "humanely" reform Germany.

Political observers on both sides of the Atlantic had high hopes that a German government under Chancellor Merkel would find an innovative answer to the question the country has dodged for years: How much government intervention and economic redistribution can Germany afford? And, pursuant to this question, which political model should the country adopt? The Continental European or the more liberal, less-redistributionist Anglo-Saxon model?

Angela Merkel has answered the question in her New Year's address. But it is not the answer the political observers had hoped for: Merkel is choosing the all-too-popular path of least resistance and in doing so is aligning herself with the country's political mainstream in status quo politics.

Intra-European realities should have led the Grand Coalition to a different conclusion. Looking at the economic growth rates of Germany and France vis-à-vis the United Kingdom and Ireland, the lines between failure and success become strikingly clear. Differences in economic growth in those countries are not based on boom and bust, but on structural differences. Germany's weak economic performance can be largely attributed to the country's exuberant redistribution scheme. Astronomically high direct and indirect taxation, an overly generous welfare system coupled with a bloated public sector and government micromanagement on every level -- all -- have taken a serious toll. Even during times of a booming global economy, Germany's structural weaknesses have only allowed for moderate economic growth.

Merkel, having fully realized the government's financial over-extension, declared the reduction of Germany's high rate of unemployment as her top priority for 2006. And Merkel is right, the country needs courage -- but she is not drawing the only possible conclusion: the Merkel government will not be able to achieve a noteworthy reduction in Germany's historically high unemployment unless it is willing finally to part with much of the German Social Model.

Already, the concept of work is fairly unattractive in Germany. Not only are labor costs outrageously high, but also those currently employed are facing substantial disincentives. Many Germans ask themselves 'why work if I get more when I don't?" And those trying to make a better living for their families and willing to put in overtime at work are punished. For every 100 Euros of additional before-tax income, only between 32 and 35 Euros remain after income taxes and social security taxes are taken out of their paychecks. The wedge successive German governments have been driving between workers' input and their after-tax income is breathtaking. This is not only morally wrong, is bears significant economic consequences. More and more workers, and many of those officially unemployed, move into the shadow economy -- not reporting the work they do and thereby avoiding taxation all together.

It's telling that in eleven out of the past twelve years, Germany did not make the list of "free countries" on the Heritage Foundation's Index of Economic Freedom. This year, Germany made it. However, Germany's 2006 ranking seems to be largely influenced by hope for meaningful social and economic reforms in 2006 and thereafter, and less by political, social and economic reality. Despite its claim to fame, Germany is still ranked as the weakest EU economy in the report -- unemployment is regarded as too high, its economic potential completely underutilized, and its economic growth is chronically low. The over-regulated and strangled labor market and sky-high public deficits only compound the problems.

Can such a system truly be a model worth preserving? Judging by the coalition agreement, her statements on New Year's Eve, and her proclaimed desire to strengthen the "social dimension of Europe" Chancellor Merkel seems to believe just that.


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