Germany?s Chained Economy: The Social Contract Frays

Amity Shlaes

From Foreign Affairs, September/October 1994

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Summary:  Germany, the grandmother of social welfare states, is being forced to take a hard look at its long tradition of generous social benefits for workers (and now for eastern Germans as well). Lengthy paid vacations, guaranteed jobs, cash-heavy unemployment benefits, and labyrinths of regulations are conspiring to set up daunting hurdles to a competitive economy. Starting a new business is laborious; hiring workers is expensive compared with elsewhere; and the country?s once-renowned education system is stagnant. Even worse, when German baby boomers are ready to claim their hallowed pensions, the money may not be there. Germans will have to pen a new social contract for the 21st century.

Amity Shlaes, a member of the Wall Street Journal editorial board, writes on economics. She is the author of a book on German national identity, Germany: The Empire Within.

The fanciful novel reads, "Guangzhou, January 4, 2022. The first world's fair in the supermodern convention center of the south Chinese metropolis has just opened." At the center of the exhibition, perpetual economic leaders such as Japan and the United States have set up their stands. Germany, however, is nothing more than a tiny, unimportant player relegated to a far corner. There, its diplomats to the world's fair "wait around with embarrassment for a call from the Korean prime minister . . . [he] had important commitments, but he has agreed to appear out of old loyalty."

This particularly German nightmare of geo-economic humiliation comes from Can the Germans Still Be Saved?, a 1994 book by Herbert Henzler, chairman of McKinsey Germany, and Lothar Spaeth, a former state governor and chief executive of the firm Jenoptik. Their scenario, of course, is exaggerated. After all, Germany is currently bursting out of its recession; 1994 in the newly enlarged Federal Republic, as in the United States, will go on record as a year of growth. The Deutsche mark dominates the European economy. Time and again since the birth of the Federal Republic, German leaders and economic analysts have wrongly predicted German decline. Just 12 years ago, warnings of Eurosclerosis possessed the land. National worries about competition from new, cheaper markets entering the European Community sent Germans into a funk. Gloom that Germany had hit a fateful unemployment level of two million (a bit more than half of the current level) helped topple one of the republic's most successful chancellors, Helmut Schmidt. An ordinarily foresightful columnist from the Wall Street Journal, Vermont Royster, published an October 1982 column entitled "End of a Miracle." A few years later, Germany was booming.

Yet today Germany, indeed, all Western Europe, faces something more serious than a case of Eurosclerosis. If in the old days worries about competition were caused by Spanish industry or Portuguese textiles, today they come from the countries that we call "emerging markets." In the early 1980s, Asia's little tigers were too small to grab attention in Munich or Hamburg; the single big threat from Asia was still Japan. Latin America lay in the thrall of the debt crisis; Mexico teetered on the brink of defaulting on its loans. Even absent a globalized economy, Germany and its western neighbors face a new economic environment. Post-communist nations with weak currencies and labor costs one-fifth to one-tenth of Germany's are pulling in capital from sources around the globe, including Germany. And those new stars are Germany's neighbors, as close as the Czech Republic and Poland, just a few hours to the east of Berlin by automobile.

For Germany, the grandmother of social welfare states, these changes pose a challenge to national identity unprecedented in the postwar period. The phrase "we are a socially oriented nation" is often the first one out of the mouths of Germans seeking to explain a century-long commitment made by the strong to the weak. Since World War II, the ...

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