New Democrat Bill Clinton has often spoken admiringly of Germany’s extensive safety net and comprehensive government-sponsored job-training programs. But just at the moment that the German-style “social market” is coming into fashion in Washington, it is actually retrenching under pressure from the same ills that plague America: slow growth and growing government debt. Last week Chancellor Helmut Kohl’s center-right government unveiled a 845.2 billion package of social-benefits cuts designed to keep the deficit from hitting record levels next year. “If we did not act, we would have federal deficits in the triple-digit billions,” says Finance Minister Theo Waigel.
Germany is not alone. Most other Western European countries are also cutting back their generous welfare systems and privatizing state-owned industry. At one time, a healthy, secure and happy labor force was seen as an aid to competitiveness. Now welfare and its attendant bureaucracy are increasingly seen as reducing economic flexibility. As unemployment mounts across the continent, a growing body of economic wisdom points to payroll-tax-financed benefits as a job killer, mostly because new hires mean bigger tax bills for employers. Among other things, Germany’s payroll taxes finance pensions, health care and unemployment benefits–the costs of which have mounted rapidly as the country absorbs 18 million citizens of the bankrupt former East Germany. Such benefits, economists say, reduce the incentive to work. “If the income of a family of five with one income earner is often less than the corresponding welfare benefits,” says Hansgeorg Hauser, finance spokesman for the Christian Democratic Union, “that shows clearly how necessary a restructuring of the social-security system is.”
But in Germany, as in the United States, bitter budget medicine does not go down smoothly. Unions, liberal advocacy groups and the Social Democratic opposition all blasted Kohl’s proposed cuts as an effort to make the poor pay for reunification. Critics point out that the government plans to cut jobless benefits, which came to about $29 billion in 1991 at a time of rising unemployment. Meanwhile, farmers and industrial concerns get to keep some $80 billion worth of subsidies.
The debate over Kohl’s cuts should sound familiar to Americans in other ways, too. Consider the rhetoric. just as critics have dismissed Clinton’s deficit-reduction package as overhyped and overblown, many Germans question whether the social-welfare cuts will actually materialize. They also worry that cutting the budget in the middle of a recession will do more harm than good. “One shouldn’t be surprised to find that in the future the deficit is even higher than before,” says Hans-Helmut Kotz, senior economist at the Deutsche Girozentrale, a leading bank. Though Americans marvel at the Germans’ disciplined acceptance of paying a maximum income-tax rate of 50 percent, some Germans complain that that isn’t enough. “German society expects very, very much from the state, but its readiness to pay for it is limited,” says Kotz. Having promised a costfree unification with the East, Kohl seems generally to have held off on administering higher taxes and spending cuts to pay for reunification until the last possible minute. And, with a German election approaching in 1994, he’s trying to keep the cuts to a politically acceptable level or even postpone them until after the vote. Conveniently, Kohl was on vacation in Austria when last week’s cuts were announced. He left Waigel to deliver the bad news.
But President Clinton would clearly envy one feature of Germany’s system: most of what Kohl proposes should have no trouble becoming law. That’s because of Germany’s parliamentary system. Most of the haggling among interest groups was already carried out within the party ranks before a law was presented to Congress and the public. The vote in Parliament itself will proceed with only a minimum of opportunities for opponents to change the bill. For better or worse, Germany still does one thing relatively efficiently: make decisions.
