Looking Abroad for Reform Models
October 13, 2005
How to get more people working and increase Germany's economic growth will be a critical topic when the members of a possible power-sharing coalition of the Christian Union and Social Democratic parties meet for negotiations next week.
Over past five years, Germans have watched their country slip in European business and economic rankings. Suffering from 11 percent unemployment and anemic 1.6 percent growth, Germany will need to see substantial economic improvement if it doesn't want to break European Union debt rules for a fourth time in a row next year. It is doubtful that will happen, since Germany's 2005 growth rate is forecast at only 0.8 percent.
Organizing the budget
Great Britain and Sweden once had similar problems of low, sometimes even negative, growth and high unemployment on par with Germany today. Both nations started turning themselves around by cutting state expenditures and privatizing state-run companies. Sweden then went on to invest 6 percent of its GDP in education and Great Britain instituted labor market reforms focused on cutting unemployment.
"Big EU states like Germany, France and Italy are struggling with their budgets and are not doing well economically, while smaller states that have a better grip on their budgets, such as Great Britain, Denmark and the new members states in eastern Europe, are doing better," said Benjamin Scharnagel of the Cologne Institute for Economic Research.
Regardless of whether German politicians ultimately choose to mirror Sweden's, Britain's or another nation's reform processes, they should note that the first step has always been cutting state spending, which has shown to be an effective way of increasing private investment across Europe, Scharnagel added.
Getting out of Germany's dire budgetary situation is an issue the grand coalition parties principally agree on. That should also please officials in Brussels, who are demanding Germany meet regulations set out in the EU's Stability and Growth Pact by bringing the deficit down to less than 3 percent of the GDP by 2007.
"A grand coalition could achieve quite a bit when it comes to reorganizing state expenditures," said Carsten Seim a spokesperson for the Initiative for a New Social Market Economy, a pro-business, pro-economic reform group. "Arguments that the next high deficits are inherited headaches from previous administrations are not possible in a grand coalition, and the reciprocal accusations over unpopular cuts would also not apply."
Jobs could bring growth
In addition to reigning in public finances, German growth could be stimulated by getting more people into jobs, following a system employed in Great Britain, according to Henning Klodt of the Kiel Institute for World Economics.
By the 1980s, Britain was faced with an unemployment rate of over 11 percent and the country had sunk into an economic malaise. In terms of national wealth, the UK was 8 percent below the average western European average. According to many, Prime Minister Margaret Thatcher's sometimes controversial reforms, which reduced public spending, lowered direct taxes, deregulated and privatized state-run companies, were key in turning Britain's economy around.
"Thatcher's reforms in Great Britain in the beginning of the 80s, which were also carried out by Tony Blair, demanded people either learn a new trade or do community work," Klodt said. "The German Hartz IV reforms started on this path but were not completely implemented," he added, referring to the spate of controversial welfare and labor market reforms that Chancellor Gerhard Schröder's government instituted to spur economic growth.
In fact, questions on whether the reforms went too far in cutting benefits for the unemployed kept Chancellor Gerhard Schröder from applying all the changes and rebellion within his own ranks ultimately led to his decision to call early elections, Klodt added.
"Now I fear that the SPD will slow down labor market reforms that go further in this direction," he said, referring to the chances that a grand coalition government would be able to enact serious reforms to the labor market. "Schröder was on that path and that is what led to his problems."
Difficult to pick and choose reforms
The concentration of both major parties' attention on growth and unemployment should have a positive impact on the nation's economic predicament, Scharnagel said.
"In a grand coalition we can nearly assume the economy will improve as it will have to focus on budget issues," he added.
If Germany were to follow England's lead, per capita GDP growth could increase to 2.1 percent by 2009 and leave Germans with an extra 503 euros ($603) in their pocket by the end of 2009. The Swedish model would yield 1.9 percent growth and an average of 257 euros more per person, according to Seim.
But the experts agreed turning an economy around isn't as easy as simply applying programs that worked in other countries.
"While it is worth considering what was successful in other countries, it is impossible to take individual elements from other nations, put them in place here and expect the same results," Klodt said. "You cannot put reforms in a shopping basket then make them work at home."