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What the Change in Germany Means

Mises Daily: Monday, January 26, 2004 by

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For those who like to entertain themselves with the workings of the "political process," these are fascinating times in Germany. In the country which is one of the last survivors of the classic European welfare state and, arguably, the one with the most encompassing public redistribution machine in the name of "social justice," some legal reforms came in early December of last year. Some commentators call the changes revolutionary, while others say they are just smoke and mirrors. What gives?

I wrote here more than a year and a half ago ("Ludwig Erhard, We Need You") on the same topic and this is a good opportunity for a quick look back. In early 2002, Germany was plagued by zero growth, an unemployment rate of around 9% and a monstrous scandal at the Federal Labor Agency (Bundesanstalt für Arbeit – BA). Amazingly, the government in power nevertheless managed to win the parliamentary elections in the fall later that year.

To a significant degree this was possible because of astute, albeit rather reckless, political maneuvering on behalf of the red/green coalition: gaining votes by feeding anti-US sentiments in the face of war in Iraq and by what was perceived by many as good crisis management after the worst flooding in Eastern Germany in living memory (complete with Chancellor Schröder parading around the broken dams in yellow rubber boots).

Now it seems clear that 2003 ended with a negative compound growth rate, while unemployment has risen to over 10%. As for the BA, after calls for its abolition following the 2002 scandal subsided, the various stakeholders rolled up their sleeves and started to "reform" the bureaucracy. So far, the only clearly visible result is a new name (from "institute" to "agency"), a spanking new website and, as surreal as it may seem, a few thousand new public employees, hired to take on the new tasks arising from the "reform." Unemployment is rising? Hey, spend more public money on the labor office!

So, nothing has changed, has it? Well, yes and no. After getting re-elected, the German Chancellor announced his reform "Agenda 2010." In short an assortment of piecemeal changes in tax, labor, social, and regulatory policies. Since after the 2002 election majorities are such that the CDU (Christian Democrats) and FDP (Free Democrats) opposition control the upper chamber (Bundesrat), much political haggling ensued. Laws proposed by the government did not get ratified and under the German system were being sent to a "reconciliation committee" (Vermittlungsausschuss), where representatives of both Chambers submerge themselves in what has become known as the "dark chamber" and try to hammer out a compromise.

The compromise which after two weeks was announced in early December amid much fanfare, for practical matters does not amount to much: move forward half of a tax reform that has already been written into law by one year; finance the 8 to 9 billion Euros in forgone taxes with 30% of new debt, the sale of several entities still in state hands (like airports), and a timid reduction in subsidies. Also part of the deal is to make it easier for companies of up to 10 people (current threshold stands at five) to lay off people, and a reform of the crafts and trade regulations.

In other words, this package cannot be considered a profound structural change of German society, much less a clear departure away from the all encompassing state and toward more individual liberty and responsibility. The biggies, for instance, in labor market reform, like doing away with industry wide wage standards, were not touched.

However, the December compromise in my opinion is remarkable for two reasons: first, it made clear to a lot of people that the current constraints on freedom brought about by a suffocating state and ubiquitous regulation does not, to use a popular image, lie over the country like a wet blanket. Rather the system that has been built up over the past decades compares to a cancer whose metastases have spread everywhere.

Second, though, it shows that something has started moving. Take the proposed reform of the crafts and trade regulation. Let us remember that in Germany you must be trained and certified (Meisterzwang) according to a certain system to be allowed to carry out some 90 odd different crafts. Without the title you cannot operate a barber shop or run a painting business.

Rightly, this system has often been compared to medieval guilds, its main raison d´être being to maintain high barriers of entry for outsiders. But it is strongly entrenched in culture and power structures. So the intention now to reduce the Master requirement from over 90 to 41 crafts and to allow, for example, someone after only a few months training to paint walls (albeit the new law opaquely stipulates that the same business then would not be allowed to hang the wallpaper, too) is at least something, given the circumstances.

The fact that such proposed changes can be considered remarkable probably speaks volumes about early 21st century Germany (and, by analogy, about much of the "Old Europe"). But Douglass North was right in pointing out that institutional change is "incremental and slow." So much more so when the institutional structure forms an overbearing state and a society with marked corporatist traits. Every attempted reform calls into action the defenders of the status quo who do have something to lose. Problem is, the welfare state creates such a tight network of rent-seekers and winners from redistribution that everyone has something to lose and thus practically everyone opposes one necessary reform or another.

As someone has wisely noted: there is no guarantee that when changes come that everything will be better than before. But if the situation is to improve, then things must change. Wish us luck.

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Frank Vogelgesang holds a degree in economics from the University of Freiburg and an MBA from Thunderbird. After working in The Americas for almost 10 years he now works as a self-employed international business consultant and freelance author in Germany. Send him MAIL.