Posted on 01/22/2003 4:49:11 PM PST by MadIvan
Germany is still the third biggest economy in the world but it is suffering from rising unemployment, massive capital flight and a growth rate approaching zero.
It is fashionable to blame the current crisis on macroeconomics: a eurozone interest rate that is too high for Germany, tight limits on budget deficits and the foolish one-to-one currency swap at unification. These are all important. But Germany's fundamental structural problems would eventually have generated an economic crisis whatever the monetary regime.
The problems can be understood only by going back to the beginning of the Federal Republic. Under Allied occupation the country was rendered unproductive by a hopeless planning system and an unusable currency (the Reichsmark). Germany faced starvation. The Allied occupying forces, surrounded by Keynesian advisers, knew something had to be done and could think only of reforming the monetary system. But the country was saved by an obscure economics professor in a minor government post. He was instructed to effect the change to the D-Mark. But Ludwig Erhard did more than that. Under the guise of monetary reform, he repealed overnight all the constrictions and regulations on pricing and output that had brought the economy to its knees.
To the chagrin of almost everybody important the reforms worked and, under Erhard's wise stewardship as finance minister, West Germany made a remarkable recovery. It had the freest market in Europe, outside Switzerland, and within a decade had approached the top of the economic league. While Britain was struggling under nationalisation and a costly welfare system, West Germany prospered. Konrad Adenauer, the chancellor, was sceptical of the market but too interested in world affairs to bother about economics, so Erhard had a free hand.
So is the solution to Germany's current sclerotic economy to be found in a new Erhard? Yes - but before we go looking for one we must understand how it all went wrong, for the ultimate failure of the Erhard programme to survive the vicissitudes of democratic politics contains timeless lessons. The ideological foundations of the Erhard revolution contained two conflicting elements that in the beginning were harmonious. Ultimately, though, one triumphed - and it was the wrong one.
Erhard's system drew upon two doctrines: Ordoliberalismus and the Sozialemarktwirtschaft (social market economy). The first was clearly free-market. During the war its founders had produced a coherent theory of the order of a market economy. It had a small state and a legal system designed to preserve freedom. Indeed, a success of the Erhard regime was the firm action taken against cartels which had enabled Hitler to control the economy without nationalising anything. There was an eschewal of Keynesian demand management, a fear of monetary disorder and of trade union power. The market would prove self-correcting and the central bank had to be independent.
The Erhard economy also drew on the social market doctrine and its much-vaunted consensus worked well for some time. West Germany was not disfigured by the strikes that afflicted Britain. The unions were fully integrated into the market, had mandatory representation on the supervisory boards of companies and abjured confrontation.
But the social market thinkers had a much broader agenda. Initially everybody accepted Bismarck's welfare state - covering pensions, health and unemployment insurance for those in work. However, with the reforms of the 1960s, including a ruinous extension of pension rights, Germany shifted to a costly, universal welfare system. The social element in the market economy gradually displaced the market.
There were two reasons for the original reluctance to embrace fully fledged welfare: it would have a deleterious effect on incentives and would undermine the moral basis of a liberal society. But the social market advocates were too relaxed; they believed the new order would produce enlightened people who would not need market incentives to behave responsibly. How wrong they were. Germans are normal, rational people. They will not work unless they have to. Now it often pays not to get a job and it is rational to stay in education until you are 30.
The social market thinkers have won. Germany has a vast welfare state, an almost completely unfunded pensions system that will impoverish future generations and a regulatory and tax system that offer no incentives to invest in the country. Its admired consensus is now a barrier to innovation and change.
Perhaps the biggest mistake of the "Ordoliberals" was the failure to make their reforms constitutionally permanent. Representative assemblies subject to little restraint will not stand up to pressure groups. Most German people would clearly like the system to change but it is the parties that are now cartelised and it is in their interests to preserve the present order.
Erhard was effective because of the chaos caused by a world war. The current economic regime will be difficult to reform. To make an Erhardian economic system permanent would be even more difficult.
The writer is professor of social and political theory at the University of Buckingham
Schroeder's anti-American platform is an indication that he is powerless to stop this particular train from crashing: he can't fix the economy, so therefore he'll resort to populism to maintain his support. Let's see if the Germans, for all their supposed worldliness and sophistication, are fooled.
Regards, Ivan
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