Germany is proof that Europe needs more capitalism, not less

The coronavirus pandemic is not the reason for France’s and Italy’s current poor economic health, it simply exposes pre-existing conditions that have been around for a long time. In these countries, the state has too much influence and market forces are not given enough freedom. The French president Emmanuel Macron was apparently well aware of the problems, which is why when he took office in 2017 he set himself the goal of introducing a raft of free-market reforms, similar to those implemented in Germany by the Social Democratic Chancellor Gerhard Schröder in the early 2000s.

In the years since his election, however, Macron has regrettably capitulated. He has surrendered to the intransigence of French society, which always trusts the state more than the market.

The Edelman Trust Barometer 2020, based on a survey of 34,000 people in 28 countries, conducted towards the end of 2019, reveals the extent of distrust in capitalism around the world. The statement “capitalism as it exists today does more harm than good in the world” elicits agreement from 61% of Italian respondents; only France, a traditional hotbed of anti-capitalism, registered greater distrust, with 69% of respondents agreeing that the negatives associated with capitalism outweigh the positives.

Every year the Heritage Foundation, the American think tank, measures levels of economic freedom in every country around the world. France and Italy are in a very poor position compared to their European peers. According to the 2020 ranking the United Kingdom ranks 7th, Denmark 8th, the Netherlands 14th, Germany 27th, France 64th and Italy 74th. In terms of economic freedom, Italy thus sits between Guatemala and Oman.

The example of Germany shows what positive effects pro-market reforms can have. Today Germany is in a healthy economic position, but this is not as a result of Angela Merkel’s policies; it is thanks to the reforms introduced by her predecessor, Gerhard Schröder. Given the strength of the German economy today it’s quite easy to forget that in the early 2000s the situation was dire.

Following decades as Europe’s economic powerhouse, Germany had been reduced to bringing up the rear. The unemployment rate was 11.3% and more than 4.7 million people were out of work. After stagnating in 2002, GDP declined in the first months of 2003. The state’s centralised pension fund was threatened with collapse in the face of dramatic demographic change, private consumption was falling, and ancillary wage costs rising.

Gerhard Schröder recognised the urgency of dealing with these problems: “It’s no longer a question of distributing a surplus. Additional expectations can no longer be satisfied. Instead, if we want to preserve solid prosperity, sustainable development and achieve a new sense of fairness, we will need to lower some current expectations and cut back or even abolish welfare benefits that may have been justified half a century ago, but which have today lost their urgency and thus their rationale”.

Over four years of fireside chats Schröder attempted to sell his proposals for reform to employers and trade unions. However, union leaders remained stubbornly recalcitrant, much like in France and Italy today. Sick of the union’s incessant demands for higher taxes on top earners, increased public borrowing and a one billion-euro investment scheme, Schröder lost his patience, responding to criticism during a final talk on 3 March 2003 by union leader Frank Bsirske: “That’s the stupidest drivel I’ve ever heard”.

Less than two weeks later, on 14 March 2003, Schröder presented his Agenda 2010 proposals in a 90-minute speech to the German parliament: “We will have to cut back welfare benefits, reward initiative and expect every individual to contribute more”.

Schröder’s tough and uncompromising reform package included merging the more generous jobseekers’ allowance with the less generous social security benefits at the latter’s lower level to ensure that in future nobody “will be able to sit back and let others do the work. Anybody who turns down a reasonable job offer – we will amend the criteria for what counts as reasonable – will face penalties”.

Schröder’s Agenda 2010 was designed to redress the imbalance between social welfare and the free-market economy by loosening the regulations that protected employees from unfair dismissal and cutting other workers’ benefits. The new unemployment benefit was restricted to twelve months, while jobseekers’ allowance was abolished. Stricter guidelines were applied to determine whether a job offer was reasonable or not. Job protections were relaxed and regulations for skilled trades were abolished. And all this was in addition to the tax cuts for private individuals and businesses that Schröder’s government had already introduced. Between 1999 and 2005, the top tax rate was gradually reduced from 53% to 42%.

As with similar attempts to reform bloated welfare systems in other countries, Schröder’s Agenda 2010 met with strong resistance, not least from within the ranks of his own party and the unions, who saw the reforms as an attack on workers’ rights driven by the forces of “neo-liberalism” and “market radicalism”.

However, in the medium term they proved extremely effective, helping to slash unemployment across Germany by more than 50% from 11.3% in 2003 to 5.0% in 2019. In part, this was achieved by greatly improving Germany’s ability to maintain its competitive edge in the global market, which translated into a GDP increase from €2.13 trillion in 2003 to €3.44 trillion in 2019. Meanwhile, other European countries that had failed to impose similar reforms – France and Italy, to name but two – were forced to look on with envy at Germany’s vastly improved economic performance.

If the last few decades have taught us one thing, it is that whenever state influence becomes too great, it must be curtailed with free-market economic reforms. This is what the United Kingdom did under Margaret Thatcher in the 1980s and the Swedes did in the 1990s. In both countries, excessive government influence over the economy was reduced and the market was given more freedom to flourish.

What Italy and France now need are politicians willing to push a reform agenda with the same determination as Gerhard Schröder or Margaret Thatcher – and willing to stand their ground against the massed ranks of opponents of economic reform.

Rainer Zitelmann is a historian and sociologist and the author of the book “The Power of Capitalism”.