Lessons from Greece or Germany?

[BridgeTroll]

Greek-Style Austerity Would Be Hell for Germans

Tough times are ahead for the Greeks, with the government raising taxes, cutting social benefits and selling off state enterprises. Berlin has led the European pack in demanding the measures from Athens. But economists say Germany would be overwhelmed if it were forced to implement similar measures.

The Germans are always way ahead when it comes to austerity measures -- at least when it comes to having an opinion on what cuts other countries should make. At least that's the case with the multi-billion-euro austerity package passed by the Greek parliament on Wednesday, largely under pressure from Berlin. More aid depended on more belt-tightening, according to the mantra of Chancellor Angela Merkel and other European Union leaders in recent weeks.

With this they forced a radical austerity package that will mean some â,¬78 billion ($113 billion) in savings and additional revenue by 2015. Some â,¬50 billion will come from privatizations and another â,¬28 billion through tax increases and cuts to social benefits. This comes on top of savings of almost â,¬12 billion last year, when more than 80,000 public workers were sacked and those that remained had their wages cut by 15 percent. Pensions also saw a 10 percent reduction.

The Germans see the Greeks' scrimping as self-evident. But could the Germans themselves bear such penury? Experts are sceptical. "When one considers how much we Germans bickered over â,¬5 more or less for Hartz IV (welfare benefits), it's easier to understand what we're demanding of the Greeks," said Ulrich Blum, president of the Halle Institute for Economic Research (IWH). "Such cuts would also cause problems for the German government in terms of its ability to run the country."

To envisage how such a program would burden the country, a little math is involved. Together with last year's austerity measures, the Greeks hope to save â,¬40 billion by 2015 using tax increases and spending cuts alone. That doesn't sound very dramatic, but the figure alone reveals little. To gain a real sense of the Greeks' savings efforts, one has to look at it in relation to gross domestic product -- the country's entire economic output. Then it becomes clear that within just five years, the Greeks want to cut spending by the equivalent of 17 percent of the 2010 GDP.

Similar Measures Would Crush German Economy

Applying this to Germany would amount to a savings goal of â,¬425 billion -- a gigantic sum that would mean the complete collapse of the German economy. "Removing that much money from the economy in such a short period of time would kill everything off," said Gustav Horn, head of the Macroeconomic Policy Institute (IMK).

In order to reach savings of over â,¬400 billion, Germany would have to slash spending in the areas where it has the highest expenditures -- many of which are essential to the fabric of German society and its social-welfare model. The country would have to cut some â,¬71 billion each year in the period until 2015.

Just to give you an idea of what would be involved in order to make savings of that magnitude, if the German government cut state subsidies for pensions, say, it would save around â,¬80 billion a year. Slashing unemployment benefits in addition to this would bring the total savings to â,¬120 billion. Another easy way to save money would be to simply close all the country's kindergartens, schools, universities and other educational facilities. After all, they cost the federal, state and local governments more than â,¬100 billion each year.

The political and social price for such radical reforms would be enormous. Pensions and civil servant salaries are sacred cows that neither state-level governments nor the federal government would slaughter. And public workers already crippled the nation's universities, hospitals, and administrative offices earlier this year when they went on strike to demand higher wages. The kind of chaos they would cause if their wages were slashed is unimaginable.

If the government chose not to make cuts, the only remaining option would be tax increases. But such a measure would garner only a comparatively small sum. If the so-called "solidarity surcharge," levied to pay for the costs of German reunification, were to be doubled from 5.5 percent of an individual's income tax to 11 percent, it would raise a measly â,¬13 billion.

Charging the full 19 percent rate of value-added tax (similar to sales tax) on goods such as books and food, which are currently taxed at a reduced rate of 7 percent, would bring in a maximum of â,¬25 billion. But increasing the rate of VAT to 25 percent, as has been suggested, would rake in some â,¬70 billion -- assuming people would consume as much as they do today despite the higher prices.

Social Unrest Is Inevitable

The Germans would also have to exert enormous efforts to achieve the equivalent of the â,¬50 billion in revenues that Greece is aiming to get from privatizating state assets -- despite having seven times the population and correspondingly larger state-run companies.

To compare, the 32 percent stake that the German state holds in Deutsche Telekom is worth about â,¬14 billion on the stock exchange, but would bring in much less if sold under pressure. The once-planned partial privatization of national rail provider Deutsche Bahn would have yielded proceeds of â,¬5 billion to â,¬8 billion.

But Germany already privatized a large portion of its former state enterprises in the past, and has therefore already done the painful work that Greece now has to do in record time. Athens' reforms are bound to cause social upheaval, experts fear. "Imagine Germany hadn't privatized its state-owned companies like Volkswagen, Lufthansa, Deutsche Telekom and Deutsche Post bit by bit over the years, but had to do it all within two years," says economic researcher Ulrich Blum. "It would put enormous pressure on the economy."

Greece's situation is similar to that of East Germany at the time of reunification, Blum feels. "Just like East Germany back then, Greece today can expect the transformation to trigger a shock," he says. "When the enormous public sector is trimmed down to a level that is efficient, enormous underemployment will arise. The unemployment rate could double in a short period of time."

The outlook for Greece is far from rosy. Should the government actually implement all of the recently ratified austerity measures, the country will remain in recession for a long time to come -- and social unrest will follow. Economizing, it seems, is not nearly as simple as many Germans assume .

http://www.spiegel.de/international/germany/0,1518,771751,00.html

[BridgeTroll]

OK... I will start.

The European economic model is unsustainable...

High numbers of government employees (and associated unions), social welfare recipents, and government state run industries are not sustainable...

Pensions and civil servant salaries are sacred cows that neither state-level governments nor the federal government would slaughter. And public workers already crippled the nation's universities, hospitals, and administrative offices earlier this year when they went on strike to demand higher wages. The kind of chaos they would cause if their wages were slashed is unimaginable.

Privatization should be a goal rather than a boogeyman...

But Germany already privatized a large portion of its former state enterprises in the past, and has therefore already done the painful work that Greece now has to do in record time. Athens' reforms are bound to cause social upheaval, experts fear. "Imagine Germany hadn't privatized its state-owned companies like Volkswagen, Lufthansa, Deutsche Telekom and Deutsche Post bit by bit over the years, but had to do it all within two years,"

[JeffreyS]

Germany and Sweden have large social safety nets, high amount of Government services, high taxes and a sustainable high quality of life. Turns out if you keep the people from having their lives fall apart to a devastating degree when they try to take capitalist risks and you don't underfund the government with the religion of ultra low taxes you can have abundance  and your neighbor can too.

[Kiva]

Germany has one of the fastest growing economies in Europe (faster than the US), their growth is mainly export-led, and they have lower unemployment than us (according to  "The Economist magazine" hardly a bastion of socialist propaganda). See http://www.economist.com/node/18836686

Why is this not sustainable?

[buckethead]

I'll take a stab at it: Unsustainability is derived from other, lesser productive states (Greece) who then demand bailouts from the more productive states (Germany).

How'd do?

(Facts and figures, charts and graphs to follow.)

Turns out that even more "progressive" nations don't want to be taxed to fund less productive nieghbors. Those selfish Krauts need to be taught another lesson.... greedy bastards.

[JeffreyS]

I'll take a stab at it: Unsustainability is derived from other, lesser productive states (Greece) who then demand bailouts from the more productive states (Germany).

How'd do?

(Facts and figures, charts and graphs to follow.)

Turns out that even more "progressive" nations don't want to be taxed to fund less productive nieghbors. Those selfish Krauts need to be taught another lesson.... greedy bastards.

Good point BH. I think the story is that Germany is willing to pay the price(taxes) for the QOL or general welfare they want their government to promote Greece hasn't been.  Perhaps if they are going to wagon train their economies together with the Euro they should have some fiscal standards all members have to maintain.

[Sigma]

OK Bridge Troll.  You made a statement.  Why do you believe the so called 'european economic model' is unsustainable?

Based on what evidence, and gauged against what measure of success or failure?

Allow Victor Davis Hanson to help you understand Stephen:

The European Union is unwinding for two very simple reasons. First, it is not a constitutional state, but a loose conglomeration of nations run by elites who are not responsible to the people. For decades the undemocratic nature of rule from Brussels was masked by politically correct edicts on everything from global warming to anti-Americanism. But as the money runs out, the elites’ fraud becomes impossible to hide.

Second, Mediterranean countries were allowed to cook their books in such a way that northwestern European money would continue to be loaned to the siesta cultures that had not produced goods and services to justify the influx of foreign capital and the attendant lifestyle it ensured. Now we are well past any chance that German money can be paid back; the only mystery is over the conditions of the default â€" whether slow and incremental, or sudden and cataclysmic â€" and whether it will leave in its wake a downsized EU or no EU at all.

In other words, the notion that platitudinous elites could, by their proclaimed virtue, establish a constitutional union without real democratic values proved unrealizable. More important still, socialism came to an end with fiscal insolvency. This happened, of course, most dramatically in southern Europe, where climate and culture conspired to hasten its demise; but northern Europeans now realize that they too have a rendezvous with a Greek-like reckoning unless they increase worker productivity, curb government, prune the power of public-employee unions, bring market-based incentives back into the workplace, reestablish national sovereignty, raise the retirement age, and address the declining demography that is so often the handmaiden of socialism. In short, EU elites have done what the half-century-long threat of Red Army tanks and missiles never could: destabilize Europe to the point of anarchy.

http://www.nationalreview.com/articles/270892/liberal-frankensteins-victor-davis-hanson

I don't expect you to actually read it or understand it.  But its pretty clear for people with a developed sense of reasoning.

[Sigma]

Another rant of unsupported opinion is hardly an actual answer.

I'm sure Bridge Troll doesn't need any help from someone who literally cannot tell the difference between an opinion and a fact anyways.

Wow - coming from someone who posts bed-wetting rants on global warming with absolutely no facts you will be taken seriously I'm sure.

But you are absolutely correct - Bridge Troll needs no help from anyone to handle your ignorant absurdities.

[St. Auggie]

In order to do what many countries in Europe do, you have to blow the whole system up in America and start over. I am not sure that is necessary as a short time ago our country and economy was the envy of many. It's a mess on all sides now. This is not a dem or repub thing it's an American thing. Everyone can have a decent level of life in many of these other countries, but there is a reason the USA is able to achieve financial and technological heights these countries can never dream of.  We long ago established a sink or swim system in the USA, and now that some are swimming faster and others  are sinking faster many now see the system as unfair. You can't have it both ways. But you do have to chose. 

[JeffreyS]

I don't mind the sink or swim competition it is just how sunk you can get now a days.  Henry Ford's famous seven bankruptcies before he got it right and made a great American institution doesn't seem so plausible now.  BTW I wouldn't say we have achieved some economic sustainable greatness over Germany or Sweden.  We certainly have more people but relative to size I would say they have done just as well.

[BridgeTroll]

Another rant of unsupported opinion is hardly an actual answer.

I'm sure Bridge Troll doesn't need any help from someone who literally cannot tell the difference between an opinion and a fact anyways.

Wow - coming from someone who posts bed-wetting rants on global warming with absolutely no facts you will be taken seriously I'm sure.

But you are absolutely correct - Bridge Troll needs no help from anyone to handle your ignorant absurdities.

I beg your pardon that I failed to respond as promptly as you requested.  The topic is... what lessons may be learned from what is happening to Greece in particular and Europe as a whole.  My second post already lays out the lessons I learned.  Sigmas reply is as good as any thus far... including any you may have made.  My second post largely reflects what was in Sigmas quote...

This happened, of course, most dramatically in southern Europe, where climate and culture conspired to hasten its demise; but northern Europeans now realize that they too have a rendezvous with a Greek-like reckoning unless they increase worker productivity, curb government, prune the power of public-employee unions, bring market-based incentives back into the workplace, reestablish national sovereignty, raise the retirement age, and address the declining demography that is so often the handmaiden of socialism. In short, EU elites have done what the half-century-long threat of Red Army tanks and missiles never could: destabilize Europe to the point of anarchy.

[NotNow]

I believe that this is a pretty good analysis:


http://www.economist.com/node/18070170/print


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Germany's economy
Angela in Wunderland
What Germany’s got right, and what it hasn’t
Feb 3rd 2011 | from the print edition

THE West has rightly marvelled at China’s economic miracle. Less noticed is a minor miracle in its own midst. It is time to pay attention to Germany’s new Wirtschaftswunder.

Germany had a savage recession as manufacturing orders dried up, but its economy has since bounced back strongly, expanding by 3.6% last year, far faster than most other rich economies. For sure, this was partly a “bungee effect” after a particularly deep downturn, but it is no one-year wonder. By several measures, including keeping unemployment down (it is at its lowest since 1992) and the prosperity reflected in the growth of GDP per head, Germany was the star performer among the rich G7 countries over the past ten years (see article). Germans entered 2011 in their most optimistic mood since 2000, according to Allensbach’s polls. Business confidence is at its highest since the Ifo institute began tracking it 20 years ago.

What’s Germany’s secret? It helps that the country did not experience a property or credit bubble, and that it has kept its public finances admirably under control. But above all Germany’s success has been export-driven: unlike most other big rich economies it has maintained its share of world exports over the past decade, even as China has risen.

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This is notâ€"advocates of an active industrial policy please noteâ€"thanks to a special genius among German policymakers for picking winners, though businesses have benefited from strong state-supported research institutions. Luck has played a part. Germany has a cheaper-labour hinterland right on its doorstep in central Europe that has helped companies raise efficiency and hold down pay. Meanwhile, German firms happen to produce exactly the things that a booming China wants, from luxury cars to the machinery that enables Chinese factories to be the workshops of the world. So Germany has been a big winner on both the supply side and the demand side of globalisation. The euro also provided a bonanza, thanks to (unsustainable) demand in places like Spain and Greece.

But there has been plenty of skill, too, as our briefing on German business explains (see article). German companies have excelled at seeking out unglamorous but profitable niches, and then focusing relentlessly on being the best. This is particularly true of the Mittelstand, the small and not-so-small companies that are the backbone of the German economy. The likes of Koenig & Bauer (which makes printing presses), Leitz (wood-processing machines) and RUD (industrial chains) may not be household names, but they are world-beaters.

Such traditional German virtue is now all the more effective thanks to liberalising reforms of recent years. Under Gerhard Schröder, a Social Democrat who was Angela Merkel’s predecessor as chancellor, the so-called Hartz reforms made labour markets more flexible and made work a bit more attractive compared with living on unemployment benefits. And with the loosening of banks’ cross-shareholdings, German business is a less cosy and cosseted affair; bosses are freer to cull underperforming operations and to focus on growth.

German businesses also took a gamble during the downturn. With the help of government subsidies they held on to their workers, betting that order books would quickly fill up again. They did, so German companies retained the skills and the manpower to respond quickly to the upturn.

As in Beijing, so in Berlin

All this explains why German leaders can sound a little smug these days. In Davos last week Mrs Merkel invited fellow Europeans to learn from Germany’s experience. Follow the German model, the message seems to be, and all will be well.

Others might well usefully emulate German firms’ discipline, focus and nurturing of talent, as well as Germany’s labour-market reforms and its sound finances. Yet the German model remains flawed in two important ways. First, it is too dependent on foreign demand, reflected in an excessive current-account surplus of 5% of GDP last year, while consumer spending is feeble (one reason why enthusiasm for the government is low too, see article). If every European country followed that example it would be a recipe for a slump. Instead, like China, Germany needs to rebalance its growth, with greater efforts to boost demand at home. More spending in Germany would also help struggling economies elsewhere in Europe. The second blot on Germany’s copybook is its poor record in improving productivity. In contrast to Germany’s industrial prowess, its bigger services sector remains overprotected and inefficient. More competition and less red tape would help.

Without a rise in domestic spending and progress in productivity, Germany’s success will falter. It is encouraging that consumer spending has started to play a bigger role of late. Productivity-enhancing reforms of services should be next. Half a German miracle is not enough.

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If you are interested Hartz IV (German unemployment and welfare reform)  is discussed here:

http://en.wikipedia.org/wiki/Hartz_concept

Hartz IVThe Hartz IV reform was voted in by the Bundestag on December 16, 2003 and by the Bundesrat on July 9, 2004; taking effect by January 1, 2005. This part of the reform brought together the former unemployment benefits for long term unemployed ('Arbeitslosenhilfe') and the welfare benefits ('Sozialhilfe'), leaving them both at approximately the lower level of the former 'Sozialhilfe'. The current (September 2009) level for a single person is â,¬364 per month (known as the Regelsatz) plus the cost of 'adequate' housing. Couples can receive benefits for each partner including their children.

Prior to 2005, between 12 and 36 months (depending upon the claimant's age and work history) of their full unemployment pay (60 to 67% of the previous net salary) were followed by Arbeitslosenhilfe (unemployment benefits, 53 to 57% of the last net salary). Since 2005, reception of full unemployment pay (renamed Arbeitslosengeld I), has been restricted to 12 months in general and 18 months for over 55 year-olds. This is now followed by (usually much lower) Arbeitslosengeld II if the claimant fits the requirements (see next paragraph).

Whether or not a claimant is eligible for Arbeitslosengeld II depends on his or her savings, life insurance and the income of spouse or partner. If these assets are below a threshold level, a claimant can get money from the state. The current (July 2008) threshold level is â,¬150 for free assets (at least â,¬3,100) and â,¬250 for fixed retirement assets, both calculated per capita and lifetime year.[1] Additionally, every employable individual in a communal household (persons living in and depending on the resources of the claimant), can have one car worth about â,¬7,500 and a self-used house of 130 square meters living space (more if there are other people in the common household).

To receive payments, claimants must agree to a contract subject to public law. This contract outlines what they are obliged to do to improve their job situation, and when the state is obliged to help. Unemployed persons may be forced to accept any kind of legal job. This compulsion is restricted by constitutional rights, like freedom of movement, freedom of family, marriage and 'human dignity'. If taking on a specific placement is deemed reasonable by the responsible agency, not applying will result in a reduction or even complete suspension of the appropriate payment.

The state pays all unemployed personnel with Arbeitslosengeld II, a pension scheme and health insurance.

It is possible to gain revenue from a job and receive Arbeitslosengeld II benefits at the same time. The job income will be debited from the Arbeitslosengeld II according to a formula that leaves a certain amount of the additional revenue untouched. These revenues are: a certain amount of savings, (which increases with time); â,¬100 plus 20 percent of the wage up to â,¬800 plus 10 % of the wage up to â,¬1200 (up to â,¬1500 if there are children). Through this mechanism Arbeitslosengeld II can be regarded as a sort of minimum wage barrier for employees without assets, where the minimum wage is not paid by the employer but by the state. There are criticisms that this defies competition and leads to a downward spiral in wages and the loss of fulltime jobs.

The Hartz IV reform merged the federal level unemployment agency with the local level welfare administration. This facilitated a better, case-orientated approach to helping unemployed people find work and improve personal situations. The plan's objective is to reduce 400 unemployed people per agent to fewer than 75 for up to 25 year-olds, and 150 for people over that age. For difficult cases, dedicated case managers may be deployed. Legally, however, the agencies remain separate.

By January 2005, the number of people who count as unemployed had risen by about 222,000 due to new statistics introduced with Hartz IV, and by about 300,000 because of seasonal factors (unemployment is much higher in the winter). This brought the total official figure to 5,037,000.

The Hartz IV reforms continue to attract criticism in Germany, despite a considerable reduction in short and long term unemployment. This reduction has led to some claims of success for the Hartz reforms. Others say the actual unemployment figures are not comparable because many people work part time or are not included in the statistics for other reasons, such as the number of children that live in Hartz IV households, which has risen to record numbers.

[edit] "Hartz IV" in common languageWhile the official term for long-term unemployment benefits is still Arbeitslosengeld II most Germans, even news programmes and politicians in parliament use the term Hartz IV. Hartz IV had also been voted Word of the Year 2004 by the Society for the German Language. Meanwhile it is also a synonym for the class of non-working poor and is used as a prefix in multiple contexts (i.e. low-brow daytime television programmes are referred to as Hartz-IV-TV by critics).

[NotNow]

And by the way, Sigma's points were as valid as others posted here.  I would hope that a civil discussion could be had here at some point.  An argument is not "stupid" because it does not align with one's views.

[NotNow]

The article points out the dangerous areas for the German economy.  Dependence on foreign demand, the insolvency of the EU model,  failure to improve efficiency in productivity.  The Germans will (IMHO) eventually just say no to the Greece's, Spain's, and Italy's of the EU.  This is (as BT has said) an unworkable system of support. 

As for your backhanded slap at me, and your criticism of Sigma's quote I would point out that only you are calling names here.  Sigma has kept silent.  If you would review the quote that he posted, you would find that it names the same problems with the EU that we just discussed.  I assume that you disagree with the "liberal elite" parts.  If that is the case, then you should provide facts which disprove the argument that the EU is controlled by "liberal elites", rather that calling the poster names.  To quote another poster here, take the grown up route.

[BridgeTroll]

Actually Bridge Troll, I havent posted anything at all except as a question.

Sigma's response is typically stupid, as it not only doesnt answer the question, but completely evades it and instead creates another fictionalized hypothesis.

Im interested in having the discussion with you, (and anyone else, for that matter) however, I want to respect your opinion enough to understand what you are saying before debating what I think you are saying.

So.  What parts of the 'european system' are you referring to that are 'unsustainable'?

Why do you think they are unsustainable?

What facts are you using to back up that claim?

What standards of success or failure are you using to gauge the 'european system'?

I don't think Sigmas responce was stupid either.  The writers of the article also implied the model was not sustainable.  Using Greece as the example... We could find ourselves in a similar situation but with China calling the shots.  Let me use Sigmas quote as an example...

increase worker productivity, curb government, prune the power of public-employee unions, bring market-based incentives back into the workplace, reestablish national sovereignty, raise the retirement age,

European paid holidays and vacation time are massive, ever growing government sponsored programs, huge public workforces and accompanying unions.  Greece teeters on the edge of civil war because the government needs to cut benefits and wages AND raise taxes just to get a loan to pay the bills.  The authors rightly acknowledge that if a similar circumstance should befall Germany... Anarchy would reign.

Actually Bridge Troll, I havent posted anything at all except as a question.

I know... Please comment on the article I posted.