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MIT Press 2007

"Can Germany Be Saved? The Malaise of the World's First Welfare State" by Hans-Werner Sinn

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Against the Current - Hans-Werner Sinn: Necessary Reforms for Germany
Economics Bestseller 'Ist Deutschland noch zu retten?' now in English in a fully updated edition.


Can Germany Be Saved?
The Malaise of the World´s First Welfare State
by Hans-Werner Sinn

MIT Press, June 2007, 356 pp., 50 illus.
$29.95/£18.95 (CLOTH)
ISBN-13: 978-0-262-19558-4

MIT Press, April 2009, 376 pp., 50 illus.
$21.95/£14.95 (PAPER)
ISBN-13: 978-0-262-51260-2

Against the Current - Hans-Werner Sinn: Necessary Reforms for Germany

Four years ago, “Ist Deutschland noch zu retten?”, a book written by the president of the Ifo Institute, Hans-Werner Sinn, unleashed a wide-ranging discussion in Germany regarding the country’s economic performance. With a path-breaking “6+1-point programme”, Sinn spelled out what was to be done in order to turn Germany into an economically fit place in an increasingly globalised world: Activating social assistance, early retirement with unconstrained additional earnings, investment wages, decentralised wage bargaining, lower income taxes and child-based retirement benefits were some of those measures.

Quite a bit has changed since: Germany has handed its bottom-of-the-economic-heap label over to Italy and, with a 2.8-percent GDP growth rate in 2006, it reached the average of the EU15. While the good ride could well last until the decade is out, it would be wrong to say that the country has already done its homework. The so-called Agenda 2010 was a step in the right direction, because with the abolition of unemployment assistance it lowered replacement income and, with it, the reservation wage, i.e. the wage floor for which an unemployed person is ready to re-enter the labour market. This has stimulated employment. But now, with the freshly adopted rules on a minimum wage, politics has taken a step backward. The reforms put forward by Sinn are more urgent than ever.

The current upswing masks the country’s underlying structural deficiencies. In fact, the upswing is largely owed to a booming world economy which, surging ahead at a 5-percent clip for the fourth consecutive year, constitutes a post-war record. The boom is fuelled by soaring demand for investment goods and, given that Germany has specialised in the production of such goods, it can profit particularly well from it.

Germany’s need to reform its welfare state and labour market is undiminished. The main problem is Germany’s rigid, unyielding wage structure which has been pushed up from below by the power of the unions and the wage replacements offered by the state, both in effect setting a veritable minimum wage. That’s the reason behind the many jobs that have been rationalised away, the dire state of the household-relevant services sector, the fact that Germany invests more abroad than at home, and the country’s unenviable world record in unemployment among the low-skilled. The high wages for simple work push the country much too fast in the direction of a so-called bazaar economy, in effect relocating its workbench to lower-wage countries and leaving only the sales counter here. Energies are concentrated on the capital and knowledge-intensive export sectors, including the final stages of production, but the price is an excessively rapid destruction of labour-intensive domestic sectors, which causes losses in employment and growth. The fact that the excessively rapid growth of the export sector, an unavoidable by-product of Germany’s over-specialisation, is perceived as a sign of success by the public contributes to the difficulty of realising that there is a problem at all.

The country’s demographic problems have likewise not been taken seriously yet, because Germany’s baby-boomers are now in their forties and in the prime of their working lives. The fact that Germany has the lowest number of births relative to its population among the OECD countries is widely ignored. The population shortfall will make itself felt at the latest in fifteen to twenty years and usher in a major crisis in Germany’s social security system.

Sinn discusses the structural deficiencies of the German economy and shows the way to overcome them. The German welfare state in its present form is unsustainable, the labour market is far too rigid, the labour unions are too powerful, the pensions are not assured. With the English-language version “Can Germany Be Saved” Sinn swims against the current and discusses the country’s structural problems, showing how the current upswing can be taken advantage of to push through further reforms.


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