Wednesday, July 21, 2004
The new sick man of Europe?
Time was when Turkey (the Ottoman Empire, to be precise) was called the sick man of Europe. There are probably two countries within the EU today that have earned that epithet in the past 10 years -- Germany and Italy. I will post about Italy some time in the future, but this post is restricted to the moribund state of the German economy (the third largest in the world in nominal dollars and fifth largest at PPP). Germany's GDP has grown by about 1.4% in the past decade, compared with about 2.8% within the EU and 3.3% in the United States. It's income per head has plumetted to one of the lowest in the EU. The number of unemployed remains stubbornly above 4 million. In fact, take Germany out and the EU begins to look good even when compared with the United States's economy.
The reasons have been discussed by several pundits. The inflexible labour market, unwieldy and stifling regulations, high wage costs, high taxes, an over-generous welfare state, demographics are all reasons quoted regularly in the media. Above all though, there is the cost to the Germany economy of reunification, which has really not worked out as planned. Reunification meant that overnight a nation was created with per capita incomes 13%-15% lower than in the former West Germany. And despite over $1.5 trillion being poured into the east since 1990, the high expectations from the time of reunification remains mostly unfulfilled. Mark Landler sheds more light on this in the NYT.
In its zeal to put the east on an equal footing with the west as fast as possible, the German government created a society addicted to welfare and other subsidies. The private sector withered, and by the mid-1990's the gap between east and west began to widen alarmingly. Now, with the jobless rate in some cities topping 20 percent and young people continuing to leave for the west, a national debate has begun over how to heal this limping land.The urgency is being driven in part by the eastward expansion of Europe, which has brought 10 new countries into the European Union. With their energetic workers and low wage levels, Poland, the Czech Republic and Hungary could further erode eastern Germany's position.
Having poured $1.5 trillion into the east since reunification in 1990, many Germans now regard this grand project as a costly failure - one that could drag down the rest of the country. "If we do not address eastern Germany, the financial burdens on Germany will become unbearable in the next 15 years," said Klaus von Dohnanyi, a former mayor of Hamburg. Mr. von Dohnanyi was chairman of a commission formed by the German government to draw up a blueprint for the east. The group submitted a bluntly worded report in June, recommending that the government direct the $110 billion a year it pours into eastern Germany away from public works projects like roads and bridges. Instead, the report said, it should support companies that might provide employment as well as promote research and education.
The reality is that eastern Germany does not need more public swimming pools or renovated apartment complexes. It needs more jobs, which would lure back the people who migrated to western Germany in search of work. The population of the five eastern states fell to 15.1 million in 2000, from 16.7 million in 1990.
Georg Milbradt, the prime minister of Saxony, said that Bavaria was able to reverse an exodus of people during the depressed 1950's by turning Munich into a center for the automotive and computer industries. Mr. Milbradt said the east can prosper only if it shakes off Germany's stifling labor regulations. That would drive down wages here and make the region competitive with its eastern neighbors. The trouble, he concedes, is that this would require the government to overhaul not just its policy toward the east, but its entire economic program.
The reasons have been discussed by several pundits. The inflexible labour market, unwieldy and stifling regulations, high wage costs, high taxes, an over-generous welfare state, demographics are all reasons quoted regularly in the media. Above all though, there is the cost to the Germany economy of reunification, which has really not worked out as planned. Reunification meant that overnight a nation was created with per capita incomes 13%-15% lower than in the former West Germany. And despite over $1.5 trillion being poured into the east since 1990, the high expectations from the time of reunification remains mostly unfulfilled. Mark Landler sheds more light on this in the NYT.
In its zeal to put the east on an equal footing with the west as fast as possible, the German government created a society addicted to welfare and other subsidies. The private sector withered, and by the mid-1990's the gap between east and west began to widen alarmingly. Now, with the jobless rate in some cities topping 20 percent and young people continuing to leave for the west, a national debate has begun over how to heal this limping land.The urgency is being driven in part by the eastward expansion of Europe, which has brought 10 new countries into the European Union. With their energetic workers and low wage levels, Poland, the Czech Republic and Hungary could further erode eastern Germany's position.
Having poured $1.5 trillion into the east since reunification in 1990, many Germans now regard this grand project as a costly failure - one that could drag down the rest of the country. "If we do not address eastern Germany, the financial burdens on Germany will become unbearable in the next 15 years," said Klaus von Dohnanyi, a former mayor of Hamburg. Mr. von Dohnanyi was chairman of a commission formed by the German government to draw up a blueprint for the east. The group submitted a bluntly worded report in June, recommending that the government direct the $110 billion a year it pours into eastern Germany away from public works projects like roads and bridges. Instead, the report said, it should support companies that might provide employment as well as promote research and education.
The reality is that eastern Germany does not need more public swimming pools or renovated apartment complexes. It needs more jobs, which would lure back the people who migrated to western Germany in search of work. The population of the five eastern states fell to 15.1 million in 2000, from 16.7 million in 1990.
Georg Milbradt, the prime minister of Saxony, said that Bavaria was able to reverse an exodus of people during the depressed 1950's by turning Munich into a center for the automotive and computer industries. Mr. Milbradt said the east can prosper only if it shakes off Germany's stifling labor regulations. That would drive down wages here and make the region competitive with its eastern neighbors. The trouble, he concedes, is that this would require the government to overhaul not just its policy toward the east, but its entire economic program.
