Why The Strong Man Of Europe Fell

The ever-astute Megan McArdle notes the German government’s attempts to blame the record unemployment on the Euro. The German economy, once the crown jewel of Europe, remains exceptionally weak.

Germany’s rate of unemployment in May did decline in May to 11.6% from 12%, but the rate of unemployment in Germany is still extremely high, which is the predominant reason that Gerhardt Scröder’s Social Democratic Party (SDP) has been getting slammed in regional elections, with the SDP losing big in its traditional strongholds like North Rhine-Westphalia, causing Shröder to call for elections a year early.

The fundamental problem with the German economy is twofold. First is the problem that much of Europe has been experiencing: a welfare state that’s grown totally out of control. Germany’s mired in a vicious circle: the German economy is weak, which reduces tax revenue which increases the stress on Germany’s unemployment system which then further weakens the economy. This kind of cycle is buttressed by the fact that the necessary reforms will undoubtedly result in benefit cuts which are politically suicidal in a country where labor unions are extremely powerful.

Making it worse is that by joining the Euro, the German economy is directly effected by the monetary policy of the European Union. When the United States saw the tech bubble burst, the Federal Reserve Bank opened the spigots by reducing interest rates which provided enough liquidity to soften the blow. The European Central Bank has been blamed for not cutting rates enough to do the same in the Eurozone. The ECB’s one-size-fits all monetary policy ensured that German’s loose monetary policy which had helped fuel much of the growth of the late 1990s could no longer be used to maintain that growth.

Schröder’s new opponent, Angela Merkel of the Christian Democatic Union (CDU) seems to be willing to push the German economy towards the necessary structural reforms. The problem is that although Dr. Merkel (she’s a former professor of chemistry) has been considered to be a Teutonic version of Margaret Thatcher, she’s watered down many of her proposals. Still, half a measure of reform is better than none at all, and she has stated that she’s considering ways of dealing with Germany’s confiscatory taxation and anemic economic growth.

Merkel currently holds a substantial lead in recent polling and if these projections hold, her CDU could have a parliamentary majority. Certainly the dislike of Schröder’s leadership has the German electorate looking for an alternative. However, like any election, things can and will change, and the German elections won’t be held until mid-September.

The problems facing Germany are a warning about the pitfalls of the Euro. The ECB’s tight monetary policy and the growing demands of the European welfare state took a growing economy and plunged it into recession, then took away the tools that could have been used to soften that fall. The growing Euroskepticism is justified, but the fact that it’s coupled with a desire to increase the socialist welfare states of Europe means that even if the EU gets things right, the other major structural problem is only going to get worse.

The only way to fix the economic problems of Europe is to push for less centralization and more dynamism – lower taxes, fewer economic barriers, and reductions in many of the lavish European welfare programs. Fortunately for Germany, Merkel seems to be the leader who is most likely to push for needed reforms, and she has a strong chance of winning a majority that will allow her to do her job. It took an Iron Lady to help defeat the trade unions in the UK and restore fiscal sanity to government, a legacy that has been continued by her successors. Merkel has the chance to follow in Lady Thatcher’s formidable footsteps — and the future of the German economy may depend on her willingness to do so.

One thought on “Why The Strong Man Of Europe Fell

  1. America’s problems are just as profound if not more so than Germany and the rest of Old Europe. The maldistribution of resources that come as inevitable consequences to unfettered global market forces will produce lower standards of living and higher unemployment (and underemployment) for the most vulnerable in both countries. Immigration levels that saturate labor markets, suppress wage levels, de facto segregate communities and shut the door of the political process in the faces of millions of lower-income non-citizens also pose tremendous challenges. Declining birth rates and aging populations will strain social services in both countries.

    Old Europe has its own unique problems, but so does the US, which you consistently ignore, choosing out of convenience or intellectual laziness to address America’s problems. At the top of the list….health care. Our employer-funded health insurance system is more anti-business that anything going on in Europe and is rapidly self-destructing. If current trends continue, we can probably expect one out of three Americans to lack worthwhile health care coverage in another five years.

    Meanwhile, we’re deficit spending ourselves broke. Clearly, anti-government ideologues have a vested interest in spiking deficits to neuter government’s ability to afford ANY social programs a generation from now, but for those who aren’t in on the con, a steep price will have to be paid for today’s pseudo tax cuts a generation from now. I know Europe has their own deficit problems, but does 25% of their annual federal budgets go towards national debt interest? Put on top of this our commitment to a Cold War-era military-industrial complex and our zeal to “preventative war” against nation who disagrees with us and suddenly Europe’s strained unemployment and welfare state costs look downright cheap by comparison.

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