Lessons from Germany

Spiegel Online International talks about a (relatively) strong German economic performance in the coming year, following on the heels of a strong performance for 2011.  It also draws a contrast, while outlining the jealousy of its European neighbors.

Germany’s economic success does not make the country more popular among its neighbors, though. After all, this is the same country that has been blocking all proposals to use the European Central Bank (ECB) to provide more generous financing for embattled euro-zone countries. Some European countries appear to be secretly hoping that Germany, Europe’s economic paragon, will also soon feel the brunt of the crisis.

How did the Germans achieve this?  One path is through the intermediate-term outcome of some economic and governmental reforms they put into place in 2003, in part to cure themselves of being the “sick man of Europe.”  They:

  • increased, from management’s perspective, the mobility of their labor force,
  • provided stronger financial incentives for the unemployed to go back to work, rather than paying them unemployment “benefits” for not working,
  • reduced taxes,
  • reduced government debt relative to their GDP.

One of the things the labor reforms led to was increased hiring because the reforms made it easier for employers to hire.  In 2011 alone, for instance, a half million new jobs were created in a population of 81.5 million.  Their reforms also encouraged more people to try to go back to work.  The resulting increased employment rate matched up with the lower tax burden to leave more money in the hands of individual Germans.  In short, Germany took steps to free up its economy, moving it closer to an open, free market, especially in comparison with their embattled euro-zone neighbors, and embarrassingly so relative to the US.

Their European neighbors, on the other hand, are not implementing similar reforms; indeed, although the embattled euro-zone nations are cutting spending, they’re actually raising the tax burden on their populations and businesses.  Moreover, they’re eschewing reforming their labor laws which leave unions with a decisive upper hand.

Are there lessons here for us?  Let’s see: those half million German jobs would work out to nearly 2 million new jobs in the US in 2011.  Germany cut taxes, but like the failing nations of Europe, our government insists on raising taxes.  Our tax increases aren’t even intended to close any budget gap, or to pay down any national debt, either—they’re for supporting even higher spending.  And here we are, just as are the embattled euro-zone nations, mired in a three-year-old recession in all but name—stagnating away with high unemployment, rapidly increasing budget deficits, and exploding national debt.


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