policy brief
CENTRE FOR EUROPEAN REFORM
Germany – the sick man of Europe? By Katinka Barysch ★ The main reason for Germany’s poor economic performance is a severe hangover from reunification. The cure – economic restructuring and reform – is taking effect slowly. ★ The foundations of the German economy remain strong. The country does well in terms of competitiveness, innovation, infrastructure, public services and social equality. ★ The EU can help Germany to get going again, for example through strengthening the Lisbon reform agenda, improving its macro-economic framework and shaking up the EU budget.
Germany was once the economic motor of Europe. Its large domestic market offered business opportunities for its smaller neighbours. Its high-quality machines powered manufacturing all across Europe. Its sound budget policies set the standard for the other EU countries. In the 1980s, however, the German motor began to sputter. It has since come to a standstill. In the second half of the 1990s, German GDP grew by a paltry 1.6 per cent a year, a full percentage point less than the other EU countries. Since 2000 the German economy has hardly grown at all. Unemployment has risen relentlessly and now stands at 4.4 million. Add those taking part in job creation schemes (0.5 million), those on income support (almost 3 million) and those taking early retirement (2.4 million), and it becomes clear that Germany has a problem to get its people working. A rising social security bill has pushed up the federal budget deficit, way beyond the 3 per cent of GDP permitted under the EU’s stability and growth pact. Germany, quips the British press, is Britain in the 1970s. Germany is heading for a Japan-style quagmire. Germany is the sick man of Europe. Some even pronounce the patient dead.
red tape. Others think that the euro is behind Germany’s economic woes. Britain’s anti-euro ‘No’ campaign suspects a link between the introduction of the euro and the loss of 650,000 German jobs since then. Such analysis is short-sighted and superficial. Germany is not an economic basket case, nor is its future entirely bleak. A hangover from reunification Germany’s main problem is that it is still nursing a severe hangover from its reunification party in 1990. The shock of absorbing an economy with 16 million people, thousands of outdated smokestack factories and a 50-year legacy of central planning would have brought any economy to its knees. But in the case of German reunification, a series of grave policy mistakes made matters worse.
Contrary to widespread perception, the Kohl government’s decision to exchange East Germany’s sickly Ostmark for the sturdy D-mark at 1:1 (when the official exchange rate was 4:1 and the black market rate 20:1) was not the main Many commentators blame high taxes, an problem. The currency swap bankrupted some inflexible labour market and a tangled web of East German companies by increasing the value
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