by Bruce Fenton

When the unification of the two Germanys occurred in 1990, I recall one economist calling it the worst “leveraged buy-out” in history. The only economic factors the two nations seemed to have in common was a language and a dependence on manufacturing. Germany is still struggling today, as evidenced by its economic performance.

At issue is the fact that the German economy has spent the last three years muddling along in near stagnation. Under Schroeder’s watch, Germany’s jobless total has risen above five million, and remains at more than 11%. The source of the problem stems from poor labor market performance that has weighed heavily on consumer and business confidence.

Dr. Angela Merkel’s solution proposed cuts in welfare benefits and weakened job guarantees. Some of the highest taxes on labor in Europe serve to act as a disincentive to business to create new jobs.

Trained in Communist East Germany as a physicist, Merkel chafed under the strict state controls in place at the time. With the fall of the Berlin Wall she became a political activist and held important positions in the Helmut Kohl government. When Chancellor Kohl was hit by scandal, she wrote a pivotal newspaper column that helped bring about his downfall and eventually helped elevate her to national prominence.

Germany has long been known for its strong social programs and support of organized labor. In fact, when they took on the East Germans, they inherited a huge pool of organized labor accustomed to “cradle to grave” care by the state. In today’s world of market economies this system leads to loss of productivity, loss of markets and becomes a drag on the economy.

Merkel’s platform called for Germany to reform its economic structure and become more of a market-oriented economy. She proposed deregulating the country’s labor market, simplifying the tax system, and cutting the burden on businesses for paying for the welfare state.

Conversely, Schroeder’s plan is economics as usual … extension of the state controls, taxes on high incomes, and continued high taxes on businesses to support a social welfare state whose social costs are growing faster than national productivity.

A couple of years ago, the Wall Street Journal recounted an example of a midsized family-owned business that manufactures and exports machine tools … typical of the heart of the German economy. This firm found itself unable to effectively compete for world customers when saddled by German labor laws and welfare taxes.

Their “work around” was to set up a manufacturing plant in neighboring Switzerland. Despite paying 30% higher wages, their productivity rose, and their overall cost of production dropped. If they have to lay off workers due to changing markets or demand, they can do so without having to put up with German laws on job protection and working hours.

As we witnessed in past elections, bringing social and economic reform to Old European countries is easier said than done. The uncertainties of a risk-taking, market-based economy leave too many unable to shake off the comfort blanket that comes with a strong government entitlement system.

But, there is a price for everything economic. In this case, Germans have opted for slow growth and continued high unemployment in exchange for strong social programs.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.