Postcards from Old Europe – Special Easter edition

Note: This week’s postcard comes one day early courtesy of Easter!

Easter is a time to celebrate rebirth and renewal; something many European economies could really profit from. In discussions with friends and colleagues I’ve often heard the question: “Well, why don’t you change something? Why don’t you implement reforms over there in Europe?”.

The question is obviously not that easy to answer – there is no single factor which is blocking reforms. Some hindrances to reform are common to most western democracies, while others are unique to specific countries. As I am German, I feel that I am best qualified to write about the situation in this country so I’ll take the next couple of paragraphs to lay down my opinion on the so-called “Reformstau” (Reform [traffic]jam).

Reforms are usually instituted to increase a countries rate of economic growth or to remove something which is considered to be unfair. A problem can arise when people think that increased growth will not benefit everyone equally. Many European countries have deep-rooted egalitarian instincts – people put a high value on the uniform distribution of wealth across the population. German basic law (i.e. the constitution) has an express provision in article 72 which obligates the government to establish “equal living conditions throughout the federal territory”.

One could argue that economic reforms initially heighten inequality because they benefit some constituencies more than others. This becomes even more problematic when reforms entail reducing entitlements – people quickly assume that they have more to lose than they could ever gain because they focus on the present, not the future.

The other question is: “Why do we need reforms at all?”. Most people will agree that the quality of life in Germany is very high already. Keep in mind that the growth of GDP is not the sole determinant of economic well being – most people would certainly agree that there is more to their life than GDP. Researchers at the Centre for the Study of Living Standards find that:

Per capita gross domestic product (GDP) is a poor measure of economic well-being. It measures effective consumption poorly (ignoring the value of leisure and of longer life spans) and it also ignores the value of accumulation for the benefit of future generations.


We argue that a better index of economic well-being should consider: current effective per capita consumption flows; net societal accumulation of stocks of productive resources; income distribution; and economic security.

Seen against this backdrop one could understand that people could be against reforms if they have the impression that one of the other contributors to their well being could potentially suffer as a result of implementing them.

Much data shows that Germans are rather risk averse and value the status quo highly. A visible manifestation of this is the provision of high unemployment and welfare benefits in comparison with anglo-saxon countries. A good overview of this subject is provided by the OECD survey of “Benefit Systems and Work Incentives”. Although the last survey is somewhat dated (1995) it does provide a more or less accurate view. It is unsurprising that the Scandinavian countries and Germany are at the top of the list with regard to the amount of transfers the unemployed or people on welfare receive. One only needs to look at the amount of debate which surrounded the latest bout of reforms to see that reforming this system of entitlements is very difficult. If you keep in mind that the German economy is anemic, you can readily imagine that convincing someone to give up some of his safety net today to help secure the future is a very difficult proposition.

Is this – understandable and specific – risk aversion a symptom of a timid culture. I think it is. Take the Global Entrepreneurship Monitor (GEM) for instance. It shows that Germans are much less likely to start their own company than the inhabitants of very many other countries. The GEM officially classifies Germany as “below average” along with countries such as Belgium, Sweden or Switzerland and finds that higher levels of social security lead to “much less start-up and firm entrepreneurship”. Germany also stigmatizes failure. Someone who fails in business is usually viewed as someone who “had it coming” or “who deserved it” – no wonder that the word “Schadenfreude” is unique to the German language.

As politicians are the filter through which a democratic society’s ideas pass before coming into effect via laws, it should be helpful to look at who is actually representing the German public in parliament. I don’t intend to examine party affiliations, I just want to give you an impression of the type of people that we elect into our Bundestag. Most deputies (around a third!) are career civil servants. If you add in other people from quasi-governmental institutions you get a share of 54%. This compares to around 5% in the general public. Very representative. In my opinion civil servants have learned to trust regulation and instinctively distrust market forces. This is manifest in countless bits of legislation which assume that the man on the street is incapable of talking his own life into his hands. It is very German to try to legislate everything – from how you can save to retirement to when a shopkeeper is allowed to open his store.

The combination of high living standards, a myopic outlook on life, low risk tolerance and an overbearing government which is distrustful of markets are – at least in my opinion – the major stumbling blocks in the path of any meaningful reform. Although this entire situation might seem outlandish when seen from an anglo-saxon perspective I can assure you that it is consistent when seen against the backdrop of our value system. To paraphrase a research report by Deutsche Bank “In Germany poverty is considered to be the product of injustice, while in the US the root cause of poverty is considered to be laziness”.

I wish all readers a great Easter and am looking forward to seeing you here or over at CurryBlog!