Get Germany Hiring Again

There is a good chance that Klaus Kleinfeld, Siemens' (SI ) bright and energetic new CEO, will push the Munich-based electronics and engineering giant to new levels of profit and technical innovation. But there is one thing he's unlikely to do: Create jobs in Germany. In the last decade, Siemens' headcount at home has fallen from 218,000 to 164,000, from 58% of the worldwide total to 38%. The high cost of labor has made Siemens and almost every German multinational into job exporters, and the trend is likely to continue.

As a result, Germany fails to meet that most fundamental of economic goals: providing material well-being for its citizens. Unemployment was close to 11% in December and climbing, a shameful level for an advanced economy. Joblessness is a curse not only for people without work. The high unemployment rate fosters general insecurity and is the main reason that consumer demand was stagnant in 2004 and will barely budge in 2005. Slack domestic demand spells slow overall growth.

How can Germany escape this vicious circle in which unemployment creates weak demand, which in turn hinders creation of new jobs? Everyone knows the answer: The country must dismantle regulations that make it difficult to fire people and thus discourage employers from hiring in the first place. Germany also must cut social security contributions, which are among the highest in the world and encourage employers to avoid hiring at home while moving jobs to Eastern Europe and elsewhere.

Implementing such changes is, of course, difficult, but the reforms must be made. Chancellor Gerhard Schröder's center-left government has taken some first steps, such as putting more pressure on unemployed people to find jobs by cutting long-term benefits. And Schröder displayed political courage in facing down demonstrators opposed to the cuts. His subsequent bounce in opinion polls showed that voters appreciate leadership even if they're unhappy about the cuts.

Unfortunately, the Chancellor doesn't seem to have absorbed that lesson. Political insiders don't expect him to take any more unpopular steps before national elections in fall 2006. That's a huge mistake. In fact, this is a propitious moment for political leaders to act. German exports and corporate profits are at record levels. Energy prices have receded, and the scary descent of the U.S. dollar seems, at least for the moment, to have stabilized. Pragmatic wage demands by labor unions are helping to make German workers more competitive. All that's needed is better government policy to encourage companies such as Siemens to invest at home again. If Schröder would do his part, he could count on Kleinfeld to do his.

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