Crisis in Germany caused by three main factors

February 20, 2003

Free Market Foundation

Faced with an aging population, an expanding bureaucracy and the costs of reunification, Germany is in a mess, writes Quentin Peel. What has brought matters to a head is the convergence of three factors which portend a crisis in government finance and the stifling of investment and innovation.

The first is the aging of the German population, which the country shares in common with the rest of Europe.

This problem will place an ever-growing burden on social services, including pensions and old age care, on the backs of a shrinking workforce.

The problem has been aggravated by the abnormally long time German students spend in education and the trend to increasingly early retirement, especially in eastern Germany.

The second factor has been the inexorable growth of the welfare state bureaucracy, combined with a traditional inclination to set everything in rules and regulations particularly the labour market.

The third has been the dramatic cost and effect of German unification, compounded by a succession of policy mistakes by successive governments.

To avert catastrophe, one official cautions that the following changes must occur:

Reforms to promote population growth, particularly policies that help younger men and women to raise children, including changing school hours (which currently end at 1 pm every day).

Radically trim the cost of the federal welfare state budget.

Further complicating the matter is that welfare reform is decidedly unpopular. Also, vested interests are already rushing to defend Germany’s lavish health services and there is popular support for them.

Source: Quentin Peel,

Comment & Analysis: The economy is burdened by an aging population, bureaucracy and the costs of unification. But change will not come easily while most voters feel content,” Financial Times, January 31, 2003.

For text (FT subscription required) http://news.ft.com/home/us/
For more on Germany http://www.ncpa.org/iss/int/

FMF Policy Bulletin\11 February 2003