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February 8, 2004
David Warsh, Proprietor


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Mountain of Difficulties

So the German government intends to sell 600 tons of its gold reserves — something like a sixth of its total holdings — over the next few years, in order to invest the proceeds in research projects of various sorts. Last week Chancellor Gerhard Schroeder endorsed the previously-announced plan.

It is a potent symbol of the recognition that knowledge, not cash, is what makes us rich.

A more potent symbol of the reality immediately facing Germany, however, was the step that Schroeder took at the end of the week. He resigned his chairmanship of the Social Democratic Party, ostensibly to push the ambitious restructuring of Germany’s welfare state his government late last year persuaded parliament to undertake, known as Agenda 2010.

In fact, analysts agree that Schroeder resigned so that a close ally, party whip Franz Muentefering, could shore up support among the faithful. Social Democrats face more than a dozen regional and local elections this year, and membership has been declining at an alarming rate.

In the worst case, Schroeder’s center-left government could fall before its term ends in 2006. Currently it shares power in a coalition with the Green Party. The Christian Democrats, German’s largest conservative party, which governed for 16 years under Chancellor Helmut Kohl, are in the wings. Schroeder took over from them in 1998.

The newspapers are full of variations on this theme: “We must be careful to keep the people (the electorate) on board.”

The economic problems that Germany is facing are the same as those afflicting all the other nations that fought World War II — a considerable imbalance in financial claims among its generations.

The so-called Greatest Generation, meaning those who actually fought the war and laid the basis for the peace that followed, are mostly gone now. But their children, the generation of the Baby Boom, have no intention of collectively leaving the scene any time soon. During the thirty-year post-war boom, they won a high level of accommodation.

Now, the somewhat smaller cohort of the Third Generation, the grandchildren of the generation of WWII, are worried about how they are going to pay for their parents’ long, comfortable retirement — much of it financed through pay-as-you-go government spending on healthcare and income security programs.

In Germany, the combination of an aging citizenry and a slowing economy is especially acute. It is aggravated by a penchant for collective decision-making that discourages flexible transformations, and a reluctance to readily admit foreigners into positions of influence in the home economy. (Immigration is a potent source of US economic growth.)

Germany is a wealthy nation. In principle, the imbalance is easy enough to fix — just as all that is necessary to insure financial stability in the future in the United States, in principle, is for the Republicans and the Democrats to get together and agree to get along. The difference is that in Germany, in principle, that has already happened. That is what Agenda 2010 is all about.

The combination of fee increases, benefit cuts, streamlined taxes (and lower rates), subsidy trims and job market reforms that parliament accepted in December is designed to be phased in over several years. It has been described (by Bertrand Benoit of The Financial Times) as being “the most far-reaching economic reforms in Europe since Mrs. Thatcher’s free market revolution almost a quarter-century ago.”

Already, the first of the health care reforms have begun to bite — a one-time co-payment fee of $12.50 quarterly for doctor visits that used to be entirely free. And if that seems like something less than shock therapy, remember that anger among those who believe that Social Democrats must stand for socialist principles is such that the chancellor has handed over party leadership to a full-time handler, lest the fragile consensus be swept away, leaving Germany worse off than before.

No wonder, then, that Schroeder wants to shift attention to innovation, education and research. Compared to the mountain of mundane political difficulties that is reflected in the opinion polls, shaping up the university system and mining the mountain of gold is the easy part.

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