The German success story and its mixed results for ordinary Germans throws some light on the UK’s economic challenges.
My provocation to those assembled for dinner last friday at the UK Ambassador’s residence in Berlin almost fell flat. Near the top of the political and policy agenda in the UK for many decades have been proposals for public service reform based on the assumption that in key ways these services are failing, ‘why’, I asked, ‘is such a debate largely absent in Germany?’.
The intention of this rhetorical ploy was to encourage the various policy experts present to reveal that there are similar anxieties below the surface in Germany or – if there are not – that there should be. Instead, the substance of the first, authoritatively delivered, response from the head of the table was to suggest that Germany doesn’t really have a problem that needs solving.
Partly, we were told, this is because of certain structural characteristics of German public services such as their devolved nature and the existence of multiple providers comprising state and church welfare organisations. Partly, it is also the absence of a fiscal burning platform given that the economy is relatively buoyant and taxes are high. But it was a third set of reasons which were most intriguing.
Having read some of the commentary about the forthcoming German general election, I was aware of a widespread view that Angela Merkel, who is herself a cautious, consensual and pragmatic leader, has benefitted from the radical reforms (particularly of the labour market) put in a place by her widely disparaged predecessor Gerhardt Schroeder. What I had not fully appreciated were two reasons why these reforms were able to be so radical.
First, the German people were willing to accept tough measures as the price for successful reunification of their country. Not much more than a decade ago, as the German economy tottered under the weight of reunification, British politicians were amongst those wallowing in schadenfreude. It can sound idealistic or vague to argue that a sense of shared national purpose makes it more palatable for citizens to accept difficult change, but the German case offers a concrete example.
Second, Schroeder’s reforms were counter-cyclical. In stark contrast to the plight of most European countries over the last few years, the impact of Germany’s tough choices was softened somewhat by taking place while the wider global economic context was relatively benign.
It is far from easy for any Government to replicate the combination of national conviction and global cushioning which enabled Germany to be so well prepared to weather the economic crisis, but the German case study can at least help us understand how difficult it is to achieve major reform when neither of these conditions applies.
Having said which Germany does face challenges. Whilst German workers on average enjoy much better terms and conditions than British ones, not only is the driving down of living standards which resulted from Schroeder’s labour market reforms causing resentment but also very low levels of unemployment in many areas of Germany are likely to lead in time to a rise in real wages. Put this alongside stagnant productivity and falling investment in infrastructure and the storm clouds are gathering over Europe’s economic powerhouse.
Riding a bike in hills it is best to pedal near the end of a decline to help with the start of the next incline. In nations and organisations the secret to long term flourishing is to use the momentum of previous successful change to help drive the next round of reform. But reform is tiring and success is exhilarating so always the temptation is to sit back and enjoy the view.
There is limited appetite for change in Germany right now (looking at the state of many of their neighbours you can understand why), and it’s odds on that steady-eddie Angela will be re-elected. Perhaps if I had focussed on the dangers of complacency in my dinner table presentation I would have provoked a more soul searching response.