Germany's Sozialstaat has side-stepped the industrial priorities

Germany’s nine-month old “Grand Coalition” of Christian Democrats, Christian Social Democrats and Social Democrats seems so determined to stick together that it is doing very little to promote the country as a technology-driven advanced economic power. The fears of industry and the media are being borne out, because the government has been steadily catapulted into socialistic policies –‘Sozialstaat’ – under pressure from the Left and the Greens.

The Ifo think-tank has forecast that next year’s introduction of a minimum wage will increase unemployment by 200,000 people, leading to a fall in Germany’s GDP of 0.1%. And the recently concluded pension reforms are estimated to cost the German State an additional €7bn by 2017. Along with the policy decision to increase dole payments for the unemployed, the government looks to be set on a course of increased fiscal expenditure. Critics observe that its motives are well-intended, but badly timed. The worst part of these socialist policies is that they punish Germany’s industrious employees and employers by adding to the tax burden on both. So much so that both groups, especially in the country’s manufacturing and technology sectors, are eyeing U.S. as a relocation haven because of its lower taxes, energy costs and investor-friendly policies.

German consumers and industries are equally affected by the government’s pursuit of the Energiewende – its Herculean aim of shifting energy dependence from fossil fuels to renewables by 2025. By increasing the total costs to be borne by German industry, this ambitious energy policy has been wearing away the international price competitiveness of German products. And with the euro now rising against the dollar, German exports are becoming costlier and face the risk of losing out to competitors.

Rising public spending in Germany is a thorn in the side of many, with unfinished public sector debacles like the new Berlin Airport and Hamburg’s Elbphilharmonie concert hall causing widespread public resentment and distrust. These doubts were confirmed by the recent election results in the formerly East German state of Saxony. The fall there of the Liberal FDP party and the rise of the eurosceptic Alternative für Deutschland (AfD) – a party with many similarities to the xenophobic Right – indicates German citizens blame local problems on the EU.

The EU’s handling of the Russia-Ukraine conflict has demonstrated Germany’s influence in the region, yet its heavy dependence on Russian natural gas reserves also puts it in an uncomfortable position. German exports to Russia have fallen and caused the GDP to shrink by 0.3% since the onset of the embargoes, according to Deutsche Bank.

Can the Sozialstaat offer solutions to these very varied problems? Not until economic normality has returned to Europe. That means increasing the availability of highly qualified and productive labour, corporate tax reductions that will boost production, particularly in small and medium enterprises, targeted infrastructure investments especially in road transport, and the stimulation of consumption coupled with greater investment in new technologies. In short, Germany needs to get back on track as a modern nation and re-establish its credible leadership.