Germany: The Road Back

Countries can have bad decades and then climb out of them. The U.S. experienced a nasty bout of stagflation in the 1970s before thriving in the '80s and taking off in the '90s. But sometimes, nations get stuck and slowly fade in economic vitality and international stature. Japan, of course, is the best example. Germany, it now appears, is another. Sometime in the past decade, as its population aged, the nation went from creating wealth to defending it. People became risk-averse, inward-looking, and isolationist. The implications are profound. Germany is sacrificing its young to 11% unemployment and life on the dole. It is putting great strains on the euro, the European Central Bank, and the European Union. It is fracturing the Atlantic Alliance, with Chancellor Gerhard Schröder blatantly exploiting serious differences of opinion with the U.S. on Iraq for political gain while doing little to stop his country's military from shrinking into impotence. How sad.

There's still time to reverse Germany's decline, but not much. The disastrous showing by Schröder in local elections shows that many Germans are deeply unhappy with their state of affairs and want change. In reaction, Schröder is now promising to attack Germany's problems--its inflexible labor laws, excessive taxes and regulations, and overgenerous social benefits. After a decade of inaction, false starts, and broken promises, it's hard not to be skeptical.

A bold move that radiates across Germany is required. One idea is to sharply cut all subsidies and tax breaks to fading Old Economy industries, such as shipping and coal. That would free tens of billions of euros for across-the-board tax cuts for individuals and corporations. Consumption would rise, and businesses would have profits to invest. In return, both labor and capital must give something up. The unions must let go of the Kündigungsschutz, or job protection law, that makes firing so costly that companies don't hire. Corporations must fight for reform, instead of just investing abroad to avoid Germany's harsh business climate.

Such measures would have enormous symbolic value, sending powerful signals that Germany can reverse its slide.

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