Globalization clashes with the welfare state

... and globalization wins. That is one way to interpret Hans-Werner Sinn's recent article and book on Germany's economic crisis. Here is a summary of the argument:

Europe’s largest and the world’s third-biggest economy, the world’s first welfare state, is in serious difficulties. Dubbed an “economic miracle” after World War II, the country seems to have been abandoned by fortune. From 1995 to 2006, Europe was the world’s slowest-growing continent, and, next to Italy, Germany was the slowest-growing country in Europe. Even in 2006, when it experienced an extraordinarily strong export boom, Germany’s growth rate just made it to the average of the old EU countries. Once a locomotive, Germany was the laggard of the continent, if not of the world, for the past ten years. Germany has one of the lowest net investment shares of all developed countries, bankruptcies are still high and capital is fleeing to cheaper locations in Eastern Europe and Asia. Unemployment is currently falling sharply, but the level remains high by any standard, and yet the world’s poor continue to arrive at Germany’s doorstep. Although Germany will remain Europe’s biggest economy for many years to come due to its sheer population size, one European neighbour after another has overtaken Germany in per capita income in recent years. Germany was the sick man of Europe, unable to keep abreast with Austria, Denmark, Ireland, Finland, Great Britain, or the Netherlands. The Wirtschaftswunder, the much-admired German economic miracle of the post-war period, had moved on to other places. 

...

Germany needs a radical cultural and economic revolution—a revolution as courageous as the one that occurred in Great Britain under Margaret Thatcher, though not identical to it. After 50 years of progressive entanglement, Germany is ripe for this. Who knows, maybe Angela Merkel has a streak of Maggie in her.

Germany’s institutions must be transformed, uncomfortable questions must be asked, and radical rethinking must start. Can the power of the unions continue to be tolerated? Why is the welfare state permitted to pay such generous benefits for idleness? How long can the languishing economy of Eastern Germany be propped up, and at what stage will it be simply too expensive to finance a West German standard of living there? Can Europe tolerate that Germany’s debt to GDP ratio remains way above the 60% limit set by the Maastricht treaty? Must the government tax away two-thirds of even a low-earning worker’s returns to additional effort? Why is Germany’s population ageing so quickly, and can anything be done about this? Should the childless receive a full government pension? Are immigrants a burden, or a blessing? Are the Germans prepared for competition from Poles, Czechs, Slovaks, and Hungarians, whose countries joined the European Union in 2004? Where is the new Europe headed, and what tricks does the European Union have up its sleeve? These questions demand honest answers, and then Germany needs courageous economic and social reforms with which to buy back its future.

The necessary reforms will be painful, and it will take years before these produce any noticeable results. This explains why German politicians, forever with an eye on the next election, have balked at undertaking reforms with the requisite rigor.

Hans-Werner Sinn may well be right, but I can't help but cringe whenever an economist says reforms will be painful and they will take years to produce results. If the economy is under-performing so much and reform is so badly needed, shouldn't better policies produce large rewards and do so pretty quickly? Or is this just a convenient way of covering our behinds: if reforms do not produce results, economists can always say not enough time has elapsed or that the reforms have not been comprehensive enough...

Comments

[Nicholas Beaudrot]

Didn't the NYT run an article on the end of the economic slump in Germany?

Ahh, here we go.

http://www.nytimes.com/2007/04/13/business/worldbusiness/13germany.html?ex=1334203200&en=dd2a6e97bf4035ac&ei=5124&partner=digg&exprod=digg

[dale]

Has the integration of East Germany been factored into this gloomy analysis?

Given the wide range of social patholoties available to modern societies (see the USA for examples) I see Germany in a positive light. They are undergoing an emornous task in integrating the formerly Communist East. They seem to have avoided- for these past 60 years- the sorrows of empire/militarism. They tend to be a positive force and example in the world.

In the scheme of things- the great scheme of things- is a lower rate of growth in an already highly developed country such a curse?

[dale]

There are different ways to measure economic well being:

"Unlike the United States, which has an enormous trade deficit, Germany is able to sell more goods abroad than it buys. By this market-based measure, Germany is far more competitive than the United States." This from an old Dean Baker article:
http://72.14.253.104/search?q=cache:M43-xEe8-UgJ:www.cepr.net/err/2005_08_29.htm+unemployment+rates+germany+usa+dean+baker&hl=en&ct=clnk&cd=1&gl=us

[Scott]

I question whether or not the dissolution of union power and the non-market coordinating mechanisms associated with German industrial-labor institutions will produce positive economic outcomes on the whole. German exports are globally competitive, in large part, because firms are able to negotiate wage concessions with unions whereby labor trades below market wages for higher than equilibrium rates of employment. Firms are therefore able retain their highly skilled labor force (a product of the German vocational training system which the unions play a significant role in administering.)at below the prevailing market wage.

Remove strong labor from this situation and much of your export competitiveness will likely go too.

I think the real problem is the inability of the German political economy to adapt to the production high end services high-tech goods. The causes of which are manifold.

[Peter]

I'm just back from Germany with a few comments.

First, Germany is OK, at least from what I've seen. (OK, I was not in the east.) There is a dynamic transition taking place in some of the former industrial areas (Ruhr, Bremen), but it is true that the public sector budgets are stretched. Private sector demand seems modest by US standards, but this reflects a cultural difference, probably in Germany's favor. (The obsession with cars might be an exception, but at least they drive cars, not pickup trucks, to cruise the autobahn at 200 kph.)

More to the point: Germany is an export powerhouse at a strong exchange rate. This to me is a sure sign of competitiveness.

Even more to the point: if the question is globalization and the welfare state, surely one must ask how it can be that a country like Germany is judged to no longer be able to afford benefits to its citizens today at a higher per capita income than it could clearly afford in years past at a lower income level. If the cause is greater openness, especially with the very differently endowed economies of the east, Panglossian trade theory would predict exactly the opposite.

[Thomas M B]

Hans-Werner Sinn is the most controversial economic doomsayer in Germany. Having been caught with this pants down by the current upswing, he is now trying to present his outdated visions abroad.

[guest]

"German exports are globally competitive, in large part, because firms are able to negotiate wage concessions with unions whereby labor trades below market wages for higher than equilibrium rates of employment"

Scott, the "competitiveness" of German exports largely depends on real exchange rates, which include price level differences. The relation between negotiated wage concessions and competitiveness is largely illusory.