Beating the Crisis

Germany and Europe Must Defy Political Trends

A commentary by Christoph Schwennicke

REUTERS

The European Union needs to buck the trend of less government.

Germany's economy is in good shape because it resisted the fashion of neoliberalism. Europe should show the same defiance in the face of self-serving predictions that the euro is doomed. The financial and debt crises have highlighted the need for strong governments -- and for more Europe, not less.

Former German Chancellor Helmut Kohl was in Berlin recently. Speaking in a firm voice, he expressed clear, albeit contentious thoughts. The chancellor from the last century admonished his party, the center-right Christian Democratic Union (CDU), on the 20th anniversary of its merger with its East German counterpart, to energetically defy political trends and avoid pursuing the latest fashions. Kohl said that the party could succeed in this effort, but only if it had the will to do so.

To illustrate his point, he named the somewhat unfortunate example of compulsory military service, but the subtext of his appeal went beyond the military issue. His message was that many aspects of public life, including conscription, government infrastructure and the social security systems, should not be treated like jeans, tight one summer and baggy the next. Be careful, Kohl advised his fellow conservatives, when you are told that an idea is old-fashioned and no longer contemporary. Question the motives of those who would attempt to turn entire systems on their heads.

Kohl knows what he is talking about. Former Chancellor Gerhard Schröder, who succeeded Kohl, based his entire campaign on this method. You were fine, Helmut, but now you're no longer the right guy, the Schröder campaign seemed to say -- too old-school. Kohl stood for the calcification of Germany. Schröder easily won the 1998 election.

Decidedly Démodé

Like Kohl, the idea of secure government pensions -- defended most notably by Norbert Blüm and Rudolf Dressler, was likewise ridiculed as being too old-fashioned. The criticism was justified, but Germans forgot to take a critical view of the alternative. No one questioned the magic formulas of Schröder disciples Hans Martin Bury and others, with their momentous talk of "capital cover" and privatization. It was très chic, it promised to offer a solution, and anyone who questioned it was decidedly démodé.

Capital cover has since proven to be one of the most misleading terms of the last 20 years -- it is often the case that absolutely nothing is being covered at all. Germans were led to believe that all of the problems of the social security systems could be solved by eliminating the government's stranglehold on them. In return, policy holders would have to allow financial service providers to invest their money in the capital market.

The term "capital cover" was misleading in three ways. First, it covered up the fact that contributors must contribute fresh money of their own. Second, there was the risk inherent in the capital market. Finally, there was the question of who consistently benefits from this new system.

The risks have since caught up with the new system and, in the course of the financial crisis, brought down its apologists along with the economy. Hans Martin Bury, after serving as Schröder's right-hand man at the Chancellery, worked as an investment banker at Lehman Brothers, the firm whose bankruptcy triggered the financial crisis. Private health insurance companies face precisely the same problems -- obsolescence and financial difficulties -- as their competitors in the statutory health insurance system because, on the one hand, their hand-picked, young, healthy and dynamic clientele has become older and more susceptible to illness and, on the other hand, the return on their reserves is stagnating.

Consuming Its Own Children

The capital cover system is consuming its own children, which anyone who has been caught up in the current trend of offsetting a private loan with the supposed panacea of life insurance can appreciate. Nowadays, financial advisors are embarrassed when asked about their past recommendations.

The government cannot safeguard your pensions; that's something only private financial service providers can do, Gerhard Schröder insinuated, and too few citizens sufficiently questioned this assertion. Although it wasn't the intention, the outcome was that financial entrepreneurs like Schröder's old friend, AWD founder Carsten Maschmeyer, profited handsomely from the policy while the problems of the social security system remained unsolved. Politicians and the public had succumbed to the promises of a financial industry that benefited from these innovations. A critical look at the annual statements of the new fangled pensions, known as Riester pensions in Germany, and the pension insurance system reveals that the government pension system is clearly a sad affair with a deplorable rate of return on investment. But the Riester pension also falls well short of promises. Its introduction 10 years ago constituted an admission of the complete failure of the government system. A decade later, the capital-covered Riester pension itself has also proven to be a failure.

Common sense has since taken over. Many people are dissolving their Riester contracts prematurely, preferring to take a loss than to continue filling up a barrel that could also spring a leak. The Riester pension has proven to be just as precarious as government pensions. Nevertheless, when it comes to insurance policies designed to cover old age care, capital cover is once again being considered as an option. Insurance agents are already salivating at the prospect.

Siren Songs

The capital cover trend went hand-in-hand with the privatization trend. "Privatize it!" was the rallying cry of the reformers, who stigmatized the state as a money-gobbling Moloch and led us to believe that we would be better off allowing free market forces to do their magic. Municipalities and cities succumbed to this siren song when it came time to fund public projects like streetcars and waste incineration plants. In the end, there was only one winner in this dodgy scenario known as "cross-border leasing," and it wasn't the municipalities.

Financial desperation prompted cities like Berlin to pursue the seemingly sexy idea of privatizing many municipal services, including the water supply. It had less to do with the free market economy than with the idea of a planned economy, because it became known that Berlin's agreement with the private purchaser included a clause that allowed it to raise water prices and guaranteed it high returns.

The fact that the German rail company Deutsche Bahn is currently capitulating in the face of winter is a result of the delusional notion of its former chairman that he could privatize the government-run operation and become the head of one of the top companies listed on the German stock exchange, the DAX. In pursuing this goal, Hartmut Mehdorn cut operating costs to such an extent as to render it partially inoperable. Anyone who still believes that a private railway is more effective than a government-owned one should take a train in England and then in Switzerland. The railroad, local public transportation and the water supply are better left in government hands. In this area, a government monopoly is always the lesser evil.

It was the in thing, and there were many who made a pile of money putting this particular bug into politicians' ears. Now none of this can be reversed, but a new year is the perfect time to make resolutions. One resolution would be to learn a lesson from this experience and not to succumb so readily to the nonsense of political fashions, which are all too often controlled by business interests. These days, Germany is not proving to be the fallen superstar, as it was described in bestsellers. And the new superpower, China, does not derive its strength from an unleashed neoliberalism, but from a rigorous, post-socialist neo-statism, which justifiably runs up against democratic constraints in Europe.

REUTERS

The European Union needs to buck the trend of less government.

Part 2: More Europe Is the Lesson

Why is Germany, the supposedly fallen superstar, in such good shape in the biggest economic crisis of the postwar era? Because it has maintained a more resilient industrial mix and prepared itself more effectively for the future than the Anglo-Saxon model, which had established the fashion trends of the last 30 years and had looked down on Germany with a mixture of pity and arrogance. Because smokestacks continue to belch smoke and assembly lines continue to run in Germany, and because Germany makes real products instead of packaging financial products until they are no longer recognizable.

Fortunately, Germany has succumbed only partially to the political trend of neoliberalism, and it has not been completely transformed the way Great Britain, once such an important role model, was. It is now becoming clear that a new statism is needed, and that nothing is as sturdy as a strong and solvent government.

Even though it has weaknesses and is better off not playing the investment banker, as in the case of the ill-fated state-owned banks, only a government and not a consortium of investors, no matter how large, ultimately has the strength and the endurance to overcome the sort or crisis we have experienced since the 2008 crash. Even more importantly, only the state acts with democratic legitimacy. Finally, and most importantly, only the state has the ability to ascend above particular interests and keep an eye on the common good.

The state-bashing for self-serving and economic reasons was successful and cannot be undone. Now two things are needed: the courage to admit to having succumbed to a trend, and the strength to resist the next trend, which is taking shape at a higher level. This trend consists in wearing down the euro and talking down Europe. This is nonsense. Despite its crisis-shaken members, Europe's fundamental data are far better than those of the United States. The euro has become progressively stronger and has outpaced the dollar in terms of the exchange rate. And the time will come, once again, when "the markets" will attempt to bet against the dollar instead of the euro, and to make a killing at its expense.

The Right Investment

The lesson to be drawn from the current experience should be not less Europe, but more Europe, a more integrated Europe, with weatherproof institutions like a European monetary fund, a common economic and social policy and -- if need be -- common bonds. Europe has more to offer and more to lose than just a common currency. It is more than a large trading zone. Continental Europe is a cultural zone with the world's most exemplary political value system. Anyone who attacks it or derides it is pursuing an interest, one that is economic or hegemonic. We should be aware of this. Even if Germany always supposedly pays more than everyone else, it's the right investment.

It isn't Europe's fault if Greece is ailing or Ireland is faltering. Philip Stephens, always worth reading, writes in the Financial Times that it is not the right time for the Anglo-Saxon model to elevate itself above the continental European model. According to Stephens, "Ireland's property-boom-turned-banking-bust" has little to do with its membership of the euro zone. Stephens writes that there are far more parallels with Iceland and Great Britain, two non-euro countries and members of the Anglo-Saxon boom-bust system. Iceland has already failed, and Great Britain could also fail. Stephens' article attracted less attention in Germany than the sensationalist piece on the same page, in which Gideon Rachman reasoned on how Germany is ruining the euro.

Rachman's piece was trendy and flamboyant, while Stephens' piece was clever and self-critical. The political debate needs more people like Stephens and fewer like Rachman. It needs people with the confidence to buck the trend and say: hold on a minute. This vigilance is urgently needed, following the experiences with the "completely misunderstood concept of freedom," which Angela Merkel, in her speech to commemorate Norbert Blüm's 75th birthday, recently identified as the cause of the global crash.

At Merkel's reformist party convention in Leipzig in 2003, Blüm was greeted with icy silence for voicing precisely the same thought.

Translated from the German by Christopher Sultan