Germany reaps rewards of entitlement cuts

The financial crisis has turned Europe topsy-turvy, with governments freezing pensions, unions voting away privileges and a thick web of safety nets disappearing one strand at a time.

But as the role of the state is being reexamined, one country stands apart: Germany, where reforms a decade ago made the country less generous than some of its peers but also helped ease the blow when the rest of the world stopped snapping up BMWs and Bosch washing machines.

Now, as its neighbors are being forced to retrench, and the future of the euro appears imperiled, Germany’s social services are running surpluses, helped by taxes that are among the highest in Europe and difficult sacrifices its citizens have made to jump-start their economy.

Many Germans are peering across their borders and wondering why others can’t do the same, putting intense political pressure on Chancellor Angela Merkel not to appear too generous with bailouts. Other countries point out that Germany’s wealth depends at least in part on outsiders spending for German exports.

Germany’s growth has slowed, to near flat in the second quarter of this year, and Merkel’s commitments to keep funding bailouts have come under attack both in Parliament and in the country’s constitutional court. But economists say that Germany’s own social services are sustainable, protected by the surpluses.

The crisis has forced other European countries to curtail their old ambitions. Already, France has increased the cost of medical treatment and pushed back the retirement age. Britain tripled university tuition fees. Spain’s Socialists took the distinctly un-
socialist approach of restricting union bargaining rights. Greece has been forced to take biting austerity measures.

“Southern Europe is talking about cutting the generosity of their welfare systems,” said Andreas Knabe, a labor economist at the Free University in Berlin. “The German discussion is centering around entirely different things.”

A decade ago, that wasn’t the case, as Germany faced stagnant growth, forecasts of rising joblessness and the spiraling cost of unemployment benefits that paid many workers more than half of their old salary indefinitely. The country was lagging behind many of its neighbors.

Then-Chancellor Gerhard Schroeder staked his political legacy on a painful series of reforms that slashed benefits for people who were unemployed for more than a year, aiming to push them back into jobs. Other reforms privatized portions of the pension system, cutting guaranteed benefits. More recently, the retirement age was pushed to 67, from 65.

Unions made sacrifices, too: Wages stayed largely flat for the past decade even as industry profits and government tax receipts rose, making Germany one of the West’s most competitive exporters. This was helped along by the euro zone, which made German products cheaper abroad than they were under the Deutschmark.

Other aspects of Germany’s welfare state remained deluxe. Germans receive parental leave of 14 months at two-thirds salary, generous vacation time and publicly sponsored health insurance. And the tradeoff for flat wages has been a better chance at staying employed: If companies are struggling, they can appeal for government funds to subsidize their workers’ salaries, helping to avoid layoffs.

Schroeder’s reforms were deeply unpopular, and Merkel kicked him out of office in the next election.

But the economy has come back, even though growth has slowed in the first part of this year and turmoil has shaken the euro zone. Unemployment dropped to 6.1 percent in July, the lowest since January 1992, in part because Schroeder’s cuts to benefits helped foster new low-end service jobs by creating a pool of people willing to work for less money after their unemployment benefits ran out.

Many German workers are unhappy with the new jobs, saying that they don’t pay well enough to live a comfortable life. But many economists argue that the diversified job market has helped bolster Germany’s economy as a whole — and with that, the country’s ability to maintain its social services.

That improvement can be measured on balance sheets, as numbers have turned from red to black. In the first quarter of 2011, the latest for which figures are available, the government collected more money for its health insurance programs and unemployment funds than it paid out, running a $140 million surplus for its social programs overall.

Passing the toughest test

The system’s toughest test came during the global financial crisis of 2008 and 2009, when demand for the country’s high-quality exports flatlined and employers were poised to lay off hundreds of thousands of workers. The upheaval threatened to stretch safety nets to their limits and deal a knockout blow to the country’s economy.

Instead, unemployment kept dropping. That was in part the result of Schroeder’s reforms but also because employers resorted to the government funds to subsidize their workers’ salaries, avoiding layoffs. Saving 200,000 jobs cost $7 billion, according to Organization for Economic Cooperation and Development estimates, but economists say the cost of unemployment benefits, lost tax receipts and hard-hit consumers would have been higher.

The beneficiaries were workers like Frank Pistoll, 51, who installs engines in high-end luxury cars at a brown-brick Daimler plant on the outskirts of Berlin.

During the crisis, there wasn’t enough work for him for weeks at a time. Before Schroeder’s reforms, if he had he been laid off, he would have received more than half of his old salary indefinitely — enough for many people his age to live on without ever needing to find another job. Because of Schroeder’s cuts, when the recession hit the benefits would have lasted just over a year, then dropped away almost entirely, and Pistoll would have had to dig deeply into his own savings.

Instead, the government started subsidizing his paycheck, easing pressure on Daimler and allowing Pistoll to keep his job, making most of his old salary.

“I wasn’t worried about losing my job,” said Pistoll, who has worked at the plant since 1986.

Feeling the pinch

All the benefits come with a price: tax bills that are the second highest in Europe, and a nagging sense of economic insecurity, because of the flat pay and the new low-wage jobs, amid the outwardly robust economy.

Average German workers send almost 40 cents of every euro they earn to the taxman, according to OECD figures — nearly double that in the United States, and well above France and Britain as well.

Unlike in the United States, a broad range of politicians in Germany support robust government services and the taxes to pay for them. Voters generally back the high tax bills, too, with 70 percent preferring to avoid new public debt instead of cutting taxes, according to a recent poll by the ARD broadcast network.

But as Germans look around them, many see a continent struggling to pay for the commitments its politicians have made — even as Germans themselves pay higher taxes for services that are at times stingier. Intense domestic opposition to bailouts has led Merkel to drag her feet in committing her country’s money to bail out Greece, Ireland and Portugal, though she has yielded thus far, making her deeply unpopular in polls.

Nor do the objections come solely from disparate tax bills. A decade of flat wages has made many Germans feel they were forced to scale back while some countries that might now need bailouts had better times. Germany’s domestic market is sluggish, the reflection of a society that saves out of a sense of insecurity, necessity and habit — and that, paradoxically, makes the country deeply dependent on the consumption of others to keep their factories humming.

That means that many German voters feel the pinch right alongside the rest of Europe — and don’t want their money to be spent on bailouts elsewhere when they themselves feel vulnerable.

The money “should be spent here” before any is sent to Greece, said Eva Froeber, 42, a former jewelry saleswoman who has been unemployed on and off for the past 15 years.

Life on the unemployment rolls used to be relatively comfortable, she said — the government would even throw in a little extra for Christmas. Now, though, she said that she has to scrape by on $1,184 a month, which doesn’t leave her with enough money to pay for Internet service at home or the new pair of glasses she has needed for years. “I feel sorry for the people in Greece, but there are poor children in Germany, too,” she said.

It all adds up in an unusual equation: decent services, job security and deep fears about the future.

After the cuts of the past decade, “it will be much more difficult for my children to live and work in the future Germany,” said Detlef Fendt, 60, a toolmaker and union leader at Daimler who has worked for the company since he was 18.

Still, Fendt’s job helped him buy the sailboat that he uses to cruise Berlin’s lakes on his days off, he doesn’t worry about his own retirement and the public school he sent his now-adult daughters to did a fine job, he said.

If Germany has its way, other countries may be forced closer to its model.

“People in countries like Greece, Spain and Portugal shouldn’t be able to retire earlier than in Germany,” Merkel said in a speech in May. “It’s important for everybody to put in effort to make it roughly equal.”

“Germany will only help when others really make an effort,” she said.

Special correspondent Alexandra Gdanietz contributed to this report.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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