Most European countries are trying to reform their welfare states in order to balance competitiveness and social cohesion. But German politics seems unable to respond, and scarcely anyone believes that long overdue reforms will be implemented either by this government or by the red-green opposition, if it wins the 1998 election. But unless you want to claim (with the federal president) that German voters and politicians are more obtuse than others, you have to consider structural causes of the malaise.

Economic globalisation and “Europeanisation” sharpen competition between companies and countries. In Germany, 36 per cent of the working population are employed in the internationally “exposed” part of the economy-compared with 32 per cent in the US or Sweden and only 27 per cent in the Netherlands.

So the good news for Germany is that the economy is more competitive in international trade than is often claimed. The bad news is that so many of its jobs are dependent on a sector which must continuously drive down costs and increase flexibility. This can be achieved through consensus bargaining between companies and unions; but it will not create new jobs. Employment in the exposed sector is not growing in any of the advanced industrial countries; the only growth is in local services such as retailing, education and health care. These local services only provide jobs for 28 per cent of Germans, which places the country almost at the bottom of the international scale: in the US and Sweden, 41 and 39 per cent respectively find employment in these services.

Germany’s high unemployment has little to do with lack of competitiveness-and a lot to do with the structure of its welfare state. This is not a matter of cost. Sweden’s and Denmark’s welfare states are much more expensive than the German one; but they spend their money on social services, whereas Germany spends it on transfer payments-mainly pensions and unemployment benefit. This is why the Swedish and the Danish public welfare sectors provide jobs for 23 per cent of their population-Germany’s employs less than 10 per cent, fewer even than the US.

But Germany’s welfare system, besides not creating jobs itself, actively hinders job creation in private local services (which employ 18 per cent of the working population compared with 31 per cent in the US). The main reason is that welfare is financed by employers’ and employees’ contributions (more than 40…

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