Tuesday, March 01, 2005

Germany's Economic Decline

In a blow to Franco-German dreams of building a US-rivaling, superpower-status European Union centered on German economic might, the German economy appears in a sustained long-term downward spiral.

Germany risks becoming the new sick man of Europe as the Continent's one-time economic giant sinks deeper into malaise and falls further behind the rest of the EU, experts warned yesterday.

The country whose post-war recovery was hailed as an economic miracle is no longer basking in prosperity but increasingly languishing in poverty, especially when compared with rival nations.

Germany's reversal of fortunes stands in dramatic contrast to its once formidable economic reputation and the current fortunes of other EU states, including Britain.

The era when its car industry symbolised the country's formidable mix of innovation and engineering skill is now over and the future seems to consist of a long period of managed decline.

By 2011, per capita income in Germany will have been overtaken by Spain, until recently one of the poorest in the European Union.

Most startling is the finding that Germany has fallen way behind Britain in economic performance and individual purchasing power.

While Germany was eight percentage points ahead of Britain just a decade ago, now Britain is nine points ahead.

If that trend continues, Germany, which has had the lowest growth rate in Europe for almost 10 years, will eventually be close to the bottom of the EU's established 15 members (excluding the 10 new members who joined last May), just above Greece and Portugal.

What has caused Germany's stunning decline? Probably the same bad economic policies that are stifling France: over-regulation and a crushingly expensive welfare state. A quarter century ago, the UK found itself in a similar position, its economy contracting, unemployment soaring, innovation lagging and talent fleeing to more lucrative shores. Prime Minister Margaret Thatcher brought Britain's economic rot to a halt and reversed it through pro-market reforms. Regulation was reduced; the business climate made more inviting. Welfare policies were reconsidered. Today the UK stands as one of the EU's strongest economies.

Experts from the New Social Market Economy Initiative recommend that the German government follow Britain's example and concentrate on tackling problems in the highly-regulated labour market in order to pull Germany out of its malaise.

They argue that the reforms Chancellor Gerhard Schröder has so far put in place, which have led to a slump in his popularity and prompted street demonstrations throughout the country, are inadequate for the task of turning Germany round.

"The recipes are out there," said Tasso Enzweiler, of the New Social Market Initiative. "To follow them we just need the British will, which is sadly lacking in Germany."

Whether the Germans can rally from their slump and embrace the economic changes necessary to rescussitate their economy and society remains an open question. Britain managed it, but only with the strong leadership of a visionary who had a strong friend across the pond. Germany has managed to alienate the US, and the ranks of its current political class shows few potential visionaries.

Its once generous welfare state now looks completely unaffordable and Germany is now suffering a brain drain of scientists.

A people with a reputation as the hardest-working in Europe have come to hate work and unemployment has reached a higher level than at any other time since the Second World War.

Despite the reality of these problems, German politicians continue to encourage additional immigration from countries whose cultures share no common values with Germany. In a country in which unemployment has already surpassed 12 percent, is there really a need for workers from abroad? And at what cost to native German workers are they imported? If the German political establishment cannot deal with even this most fundamental issue, how can it hope to restore Germany's economy?


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