- The Washington Times - Tuesday, April 6, 2004

With a flat economic outlook and several recent state elections already lost by the ruling Social Democratic-Green coalition, Germany may well get a new and more conservative government within two years.

However friendlier Germany may be toward the U.S. when led by the center-right Christian Democratic Union, the European industrial powerhouse faces many demographic and fiscal problems that may block any significant participation in U.S. global commitments for a long time.

Germany currently budgets military expenditures below the percentage of gross domestic product (GDP) required of new members of the North Atlantic Treaty Organization. That and the rising cost of generous social benefits hinders significant projection of German power. In addition, though more internationally involved than before in the last 60 years, Germans have a phobia about military interventionism after their catastrophic misadventure in World War II.

But with the Soviet threat evaporated, Germany finds itself in a friendlier neighborhood. This means the U.S. can, as now planned, reduce its troops committed in Germany, freeing them for deployment elsewhere.

Germany’s current economic growth of about 11/2 percent yearly is “Barely above the water line, and nothing to write home about,” Norbert Walter, chief economist of the Deutsche Bank Group, told an audience hosted by the American Institute for Contemporary German Studies last week.

Low growth is coupled with high debt projections due to Germany’s generous social obligations and German labor participation far below that of the United States. The German population is aging and, as elsewhere in Europe, reproduction rates are well below replacement levels. These facts require a number of basic changes, Mr. Walter said.

He noted growth is “barely out of stagnation,” and that low rate pales further given there are four additional workdays in Germany this year. Mr. Walter said the German standard of living is barely better today than 10 years ago, compared with 50 percent improvements in Britain and the United States.

In addition to prodigal social benefits, the west German economy has donated about 5 percent of its GDP — “or 1,000 billion euros” — to rehabilitating the economic ruins of former communist east German states after reunification.

He noted this investment was fifteenfold the U.S. contribution to the 2003 Iraq war. “Since the German economy is one-third the size of the U.S. economy, you could at that [German] rate fund about 45 Iraq wars.” He discussed Germany’s ambitious restoration of many historic churches and castles in the east. The churches stand closed and unused “because very few Germans attend church anymore … and the same is true for castles.”

Asked about other possible public-private uses of such antiquities, Mr. Walter said he unsuccessfully tried to interest Deutsche Bank in taking over a couple of “Schloesser,” or castles, that “would provide excellent space for a Vermeer exhibit or a symphony,” as well as meetings. As German disposable incomes limit vacations abroad, perhaps such venues could provide profitable domestic tourist attractions.

He said the “implicit public debt” of Germany, including projected outlays for pension and health care, is about 200 percent of GDP. Germans are so used to lavish benefits that “a great outcry was raised” by the recently announced out-of-pocket 10-euro charge for a doctor visit, equivalent to “the cost of two packages of cigarettes.”

Labor unions are declining in Germany, especially in the formerly communist areas where fewer than 1 in 5 workers are union members. State elections in Hesse, Bavaria, Hamburg and elsewhere posted losses for the Social Democratic Party. However, this makes it unlikely the SDP-Green coalition will call for elections until it must do so in 2006, unless Chancellor Gerhard Schroeder for some reason stands down and the coalition cannot agree on a replacement. Mr. Schroeder narrowly won the September 2002 election, with the margin attributed to his opposing U.S. military action against Iraq.

In any near-term election, Mr. Walter foresaw a Christian Democratic Union-Christian Social Union coalition victory, with CDU parliamentary leader Angela Merkel becoming chancellor.

To improve its economic outlook, Mr. Walter continued, Germany must find a way to both defer the frequent retirements of 58-year-olds and involve the 15- to 20-year-old cohort in the work place. Participation levels should be raised from about 60 percent in Germany to nearer the U.S. level of 72 percent. He said early retirements could be reduced by allowing older workers to collect pensions and taxable wages.

Warehousing younger workers in academe until nearly age 30 should be replaced with internship programs to give them practical work experience in Germany and abroad, “even to come and learn in the United States,” he said. Active involvement of the younger group is important for German technological innovation and adaptation, Mr. Walter explained.

Mr. Walter said there is a pentup demand in Germany to replace consumer durables. “We have never had such an old fleet of automobiles,” and he also said refrigerators and other household durables too expensive to repair need replacing.

Mr. Walter said Germany has benefited more than any other older member of the EU except Austria from expansion eastward. He cited the newly admitted states of Eastern Europe as a fertile source for affordable, highly trained workers: “In the current hiring of [EU] positions in Brusssels, if we did not have quotas for the older member states, probably all the new hires would have come from the East, so superior are the qualifications of their applicants.”

Mr. Walter also stressed the importance of outsourcing, and said cooperative deals with eastern Skoda autoworks greatly helped Volkswagen, whose western plants often lose money.

The difficult German economic outlook outlined by the bank economist underlines remarks recently by CDU German parliamentary and state leaders at Konrad Adenauder Foundation seminars in Washington. These also have noted the need for strong economic reform. And they have indicated Germany’s economic position (with a higher debt rate than countenanced by EU policy) means Germany has been in no position to offer significant support to the U.S. Iraq war, irrespective of the Schroeder government’s sentiment.

In an aside, the good-natured Mr. Walter echoed a feeling familiar in Europe. He said Germany has much to offer. “We don’t have urbanity in just a few places — like Boston, Washington and San Francisco. We have urbanity everywhere.”


Benjamin P. Tyree is deputy editor of the Commentary pages of The Washington Times.


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