Online Extra: "The Last Industrial Society in Europe"

Frets economist Jürgen von Hagen: Germany has no consistent strategy to improve the economy

Jürgen von Hagen, director for economic and social issues at the Center for European Integration Studies in Bonn, Germany, is a leading economist and a voice urging reform of the German economy. Von Hagen believes that the country's leaders needs to fundamentally restructure the economy, particularly the welfare state, to spur faster growth. Without more dynamism in Germany, he argues, the European economy and the drive for greater Continental unity could suffer. Von Hagen explained his views in a recent conversation with BusinessWeek Frankfurt Bureau Chief Jack Ewing. Here are edited excerpts of the interview:

Q: German growth is slowing fast, and there's a threat of recession. What does that mean for Europe?


In terms of making progress in European integration, the fact that Germany is no longer the economic engine is very significant. In the 1960s and '70s and '80s, it was often Germany that promoted new European initiatives and financed them from its economic surpluses. Germany is no longer willing or able to contribute to the same extent as before. That promotes distributional quarrels in the union and keeps us from progressing as we could have.

Q: What's the outlook for reform?


I was very optimistic a year ago. Schröder seemed to be moving on many fronts, with social-security reform, taxes, and so on. Like a lot of people, I've become more pessimistic. What we've seen is a little improvement here and a little improvement there but not a consistent strategy to improve the economy. There's not enough movement forward.

Q: What's wrong with Germany?


I wouldn't say there's anything wrong with the German people. There's a lot wrong with the way we've organized the economy. We have 9% unemployment, yet a scarcity of labor, even unskilled labor. Try to find someone who will do your yard. It's virtually impossible -- unless you find someone who says I'll come Saturday and take cash. I think there's a bit of a misperception of what's going on in Germany. The fact of the matter is we've got full employment. We've just got a lot of people registered as unemployed who are collecting benefits.

Q: So what's the solution?


We have to think about what we call our social-insurance trap. A lot of people collect unemployment assistance and social assistance, and they simply cannot afford to go to work because they would lose a lot of subsidies. The design of these transfer systems is what we really have to think about. We have to make working more worthwhile.

Q: Do you think Germans are willing to take these kinds of steps?


There's this notion [that] we want to maintain our European [economic] model. That's fine and good, but the big question is whether that's really what we're doing. Empirical evidence suggests we're taxing middle-class people and giving money back to middle-class people. It's a redistribution to people who know how to milk the system from those who don't.

Q: What else could Germany do?


One significant fact about Germany is that we're probably the last industrial society in Europe. More than one-third of the workforce is in manufacturing, compared to 20% or so in most European countries. One of the challenges in coming years is liberalizing our service sector, to make it easier to create service-oriented businesses. That's going to be very important.

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