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Western EuropeOctober 2 2005

Rejecting Merkel risks pushing Germany down a Japanese path

Germany’s reluctance to fully endorse the pro-market reform Angela Merkel could send Europe’s largest economy into deeper decline.
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Just when Germany needed strong leadership to pull itself out of an economic quagmire, it is struck down by political paralysis. The German electorate that voted in September was supposed to have understood that the days of the high-wage manufacturing power house are over: other countries can make things better and cheaper.

Global – and therefore foot-loose – manufacturing companies now move on rapidly, every time conditions in a new country become more attractive. Companies that cannot restructure themselves, that are burdened by social costs, and that cannot hire and fire, eventually come to grief.

Enough damage has already been done to the German economy for the electorate to realise that yesterday’s world of a job for life and cradle-to-grave welfare is over. Germany’s economy is growing at 0%, unemployment is 11.5% (20% in the east) and labour costs are among the highest in the world.

The population is ageing and shrinking. Annual government income of €190bn is spent as follows: €80bn on pensions; €40bn on unemployment; €40bn on debt servicing; leaving a paltry €30bn for everything else. No wonder Germany is running a budget deficit of 3.6% of GDP.

Missed opportunity

At a time of national crisis, Angela Merkel, leader of the Christian Democratic Union, offered Germany its best chance of reform. She has been likened to the UK’s former prime minister Margaret Thatcher, who came to power when the UK was “the sick man of Europe” and set about making the country competitive again. But Germans cast their votes fairly evenly between Ms Merkel and the incumbent chancellor Gerhard Schröder’s Social Democratic Party.

Taking the UK analogy further, Mr Schröder is more aptly compared to Prime Minister Tony Blair: he is interested in his poll ratings first and foremost and cares about reform only if it is politically acceptable rather than effective.

The complicated nature of Germany’s system of proportional representation also contributed to the lack of a clear outcome.

The Japanese experience shows how an advanced economy can stagnate for decades without proper policy prescription. Germany now seems to be doing its best to copy this bad example.

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Read more about:  Analysis & opinion , Western Europe , Germany