YOGI BERRA ONCE SAID”I came to a fork in the road, so I took it.” That is what Germany appears to be doing. This week marks the fifth anniversary of the reunification of East and West Germany, and after the diffculties of digesting a large Communist dictatorship, the newish nation of 80 million people is now trying to cure its competitive ills. The nation’s bureaucrats are hedging their bets, trying to reduce the size of Germany’s welfare state while attempting to impose its economic will on the rest of Europe so that if the reform effort fails, they can deploy European Union tariffs, currency laws, and other forms of economic warfare to protect Germany’s high-cost industries from the ravages of world competition. This a dangerous and unworkable conceit.
Germany has a lot of work to do if it wants to get its welfare state in line. Its non-wage labor costs (benefits, all the good stuff) now account for about 45 per- cent of total hourly labor costs. That brings labor costs to an insanely high number — five times those of Portugal, twice those of Spain and Britain, and 60 percent above those in the U.S. Jobs are fast becoming Germany’s largest export. Mercedes plans to build 10 percent of its cars outside Germany by 2000, up from 2 percent now. BMW, clothing designer Hugo Boss, and Siemens are also taking a hike.
One would think that such high hourly wages would at least have the advantage of creating a strong incentive to work longer hours. Not so: High marginal tax rates reduce any such incentive sharply. Thomas Mayer, a senior economist at Goldman Sachs’s Frankfurt office, estimates that the top marginal tax rate is now 57 percent — and scheduled to rise next year when several tax breaks now enjoyed by high earners come to an end.
There’s no tax relief in sight. Government gobbles up a bit more than half of the nation’s gross domestic product. Child allowances are due to rise. Subsidies to the coal industry seem fated to endure indefinitely. The ” solidarity tax,” a 7.5 percent surcharge on taxable income, has become a permanent feature of German fiscal policy. So who can blame a German worker for showing a strong preference for leisure over work, a fact reflected in the labor force’s high absentee rate — more than three times that in America, with most of the nation’s workers declaring themselves sick on a Friday or a Monday, when they might extend their weekends.
There is no reason to believe this situation can be reversed. The institutional structure of the economy will not permit it. Rigid rules govern everything from apprenticeship training to the hours at which shops may be open for business. Bakers” hours are a good example of the rigidities of the system. To conserve grain stocks during World War I, Kaiser Wilhelm had a law enacted in 1915 banning the baking of bread between 10 p.m. and 6 a.m. It took 53 years to get the law changed — the ban now applies between 10 pm and 4 am. Because of this anachronism, German bakers can’t get their bread into the shops early enough to satisfy shoppers’ needs. But French, Dutch, and Austrian bakers can.
Instead of reform, we are likely to see Germany respond to its woes by seeking what William Rees-Mogg calls “the Deutschification of Europe.” The instrument of the “Deutschification” is European Union and, especially, monetary union.
Joseph Schumpeter long ago pointed out that conquest by military action involves large capital expenditures, and that the administration of conquered territories is expensive. But empires can now be established by means short of war. And I use the word “empire” advisedly. Cambridge University’s Anthony Pagden points out that “empire” has meant binding together previously independent states. “Empire,” he writes, “should be understood as a diversity of territories under a single legislative authority.”
There can be no better description of the state of affairs in Europe should Germany achieve its goal of monetary union. Pagden’s “single legislative authority” would be the huge, non-democratic European Union bureaucracy based in Brussels, dependent largely on German financing. The bureaucracy is tireless, churning out regulations governing everything from the acceptable curvature of bananas to the acceptable uniform size of condoms. Any powers those bureaucrats lack would reside in a still more powerful organization, the German-dominated European Central Bank, issuer of the new European currency.
Control of monetary and fiscal policy is more than a technical economic matter. For it means that Germany will set European-wide rules that force its own trade-off between inflation and unemployment, its own view of an acceptable rate of economic growth, on other countries.
Economic and monetary union are the means by which Germany can avoid scuppering its welfare state and “social market” or, as The Times of London recently put it, the means by which it can “defend the continental model of state-administered corporatism against the depredations of the free market.”
Of course, having secured its European flank against competition from other member states, highcost Germany will still face threats from Japan and other Asian economies, America, and Latin America. But that can be handled by erecting a Fortress Europe, a wall of barriers to the goods of international competitors. True, this would place a hidden tax on all of the European Union’s consumers, forcing them to pay high prices for what they buy in order to subsidize high-cost producers at home, and to maintain their welfare states. But very few will notice this imposition, and those who do will be too unorganized to overcome the trade union-employer combination that will support protection.
Perhaps France will regain suffcient self-confidence to be willing to end its lock-step adherence to Germany’s economic master plan — but there is as yet no sign of such a development. Perhaps a political leader will emerge who can, Thatcher4ike, hector the Germans into preferring reform of their welfare state to a single currency and protectionism — but Germany’s experience with charismatic leaders is likely to make it wary of any such politician. Perhaps Europe’s elite will bow to popular will and reverse course — but that seems unlikely, since elites by their nature are given to ignoring the popular will.
So once again, the German question has reared its unwelcome head.
