Germany Reformed Its Social Model. Europe Can, Too

Josef Joffe, the editor-publisher of Die Zeit, teaches American foreign policy at Stanford University where he is also a fellow at the Institute for International Studies and the Hoover Institution. He is author of "The Myth of America’s Decline."
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Forget Europe’s debt disaster for a moment and look instead at a few numbers that dramatize the underlying problem.

Unemployment in the euro area just climbed to a record of almost 11 percent. Do we blame the financial crisis and its aftermath? Europe didn’t do much better before 2008. Even before the crash, the jobless rate was stuck at between 7 percent and 8 percent, not exactly full employment. So Europe’s problem is older than the fall of the House of Lehman.

Now slice the data another way. Eurostat, the European Union’s statistics agency, estimates that euro-area growth will be just below zero this year. The U.S. is chugging along at almost 3 percent, while unemployment there is finally heading down. So Europe is doing a lot worse than the U.S. in climbing out of the post-crash recession.

What’s holding Europe back? Is it austerity, a wave of rabid spending cuts, that makes the economy so anemic? Not really. After the crash, the euro area went into heavy deficit spending, which peaked at 6.4 percent of gross domestic product in 2009. Last year’s figure was a bit less, at 6.2 percent. That kind of public profligacy is hardly austerity; it’s twice the rate allowed under the EU’s Stability and Growth Pact, the Holy Writ of monetary union.

It’s the Micro-Economics

The message, then, has to be: It’s the micro-economics, stupid! It’s about the usual suspects: unresponsive labor markets; privileged groups, such as public-sector unions and sheltered professions; cultural taboos that brake innovations in areas such as bio-engineering; constraints on competition, such as high barriers to market entry and subsidies that keep dying companies alive; and high welfare payments that reduce work incentives.

A number that pulls all this together is Europe’s 22 percent aggregate youth unemployment rate. It bespeaks a two-tier labor market, in which the happy insiders enjoy virtually lifetime employment at mandated high wages, while the young outsiders can’t get in. If they are lucky, they snag a temp job or an internship. If not, they go straight from school to the dole.

But what about Germany? Isn’t Berlin the stellar exception? Indeed, its budget shortfall has plunged to 1 percent and its unemployment rate has plummeted. So, Teutonic discipline works. Joblessness now stands at 5.7 percent, while France’s is almost twice as high at 10 percent, according to Eurostat figures. What are the Germans doing right?

The short answer is “Agenda 2010,” a package of reforms laid out by the government of Chancellor Gerhard Schroeder. In the decade before these changes took effect, 5 million people were out of work (compared with fewer than 3 million now). Germany trailed everybody else in growth. It kept breaching the 3 percent deficit limit prescribed by the Stability and Growth Pact. The social-security system handed out more than it took in. So on 14 March, 2003, Schroeder went Churchill, delivering his own “blood, sweat and tears” speech to the Bundestag. “We will have to cut benefits,” he said. “We shall promote individual responsibility. And our guiding principle will be that we can only redistribute what we have earned.”

The lavish welfare state, he meant to say, was yesterday. Patients would now have to make co-payments for medical services. The old crafts system, a medieval legacy that protected insiders, would have to yield. Labor unions would have to climb down from rigid nationwide collective bargaining and accept more modest shop-floor agreements geared to a company’s profitability. The growth of pension benefits would have to slow. Capital-gains taxes and the top marginal rate of income tax were cut.

Page From Workfare

The core of “Agenda 2010” was a welfare reform that took a page from Bill Clinton’s “workfare” legislation. Unemployment benefits were limited to 12 months. After that, the able-bodied would have to make do with a bare minimum. The basic idea was to get people off unemployment benefits by making them look for work. To help them, the new Federal Employment Agency would counsel, retrain and place them. It worked.

Yet it was Schroeder’s successor, Angela Merkel, who would reap the rewards. In 2005, Schroeder’s Social Democratic Party was punished at the polls, and Germany’s Churchill lost his job to Frau Merkel. She has been chancellor ever since. The lesson is a sad one: To do well for the country is to do badly for yourself. In Spain, the reformist government of Jose Maria Aznar fell in 2004. Tony Blair, who opted for Thatcherism with a Labourite face, went out in 2007.

Other European leaders, looking at the sorry fates of their comrades-in-power, didn’t even try. In France, the government of Jacques Chirac just went into debt to avoid reforming the country’s statist economy. In Italy, Silvio Berlusconi promised the sky, but delivered nothing. The bloated bureaucracy and the frozen labor market stayed in place. Berlusconi’s mess is now Mario Monti’s to clean up.

Breaking the mold, it appears, is good for the country but not for those who wield the hammer. That’s bleak testimony to the rock-like nature of the European social model: high welfare, rigid labor markets, sheltered sectors and professions, low adaptability and consistent overspending. It’s an environment where the state giveth out more than it taketh in for the sake of social peace, which is a euphemism for more unto each.

”Europe speaks German now,” the majority leader in the Bundestag, Volker Kauder, famously crowed back in November, triggering a storm of indignation in the U.K. Is it indeed deutsch now for each and all? The Greeks, Spaniards, Portuguese and, above all, the Italians are trying to take a crash course in German, reining in expenditures and putting the chisel to privilege and protection. Whether the French will do the same depends on the presidential elections this month and next. The favorite in the race, Socialist Party candidate Francois Hollande, insists on speaking in the old French style, pledging to roll back even the timid pension reforms implemented under Nicolas Sarkozy.

Make it in German or Esperanto, the prescription is the same in every language: Adopt Schroeder’s Agenda 2010, and adapt it to national circumstances. Europe’s post-crash crisis has been long in the making; the crash just laid the problem bare. The true roots of Europe’s troubles are overspending that caused deficits and ran up debts -- bad habits that nourished a social model much better at redistributing income than at generating it with improved competitiveness and growth.

Can Germany prod the rest to action, be it by suasion or example? To change its economic fate, Europe will have to change its politics and its ancient social contract. If not now, when?

(Josef Joffe is editor of Die Zeit newspaper in Hamburg. He is also a senior fellow at the Freeman-Spogli Institute for International Studies and an Abramowitz Fellow at the Hoover Institution, both at Stanford University. The opinions expressed are his own.)

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