Summary

1. The Federal Republic of Germany:
A Model Put to the Test

• The Development of the (West) German Model
• The Model Reaches its Limits
• Placing Structural Problems Centre-Stage
• Against Superficial Strategic Concepts: social and environmental dead ends
• Economic Performance, Social Cohesion and Environmental Sustainability - Three Goals, One Path
• Four Strategically Important Reform Projects

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Summary

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1
The Federal Republic of Germany:
A Model Put to the Test

The Development of the (West) German Model

The German model as it has evolved during the post-war period is characterised by a dynamic economy, a co-operative political system, a welfare state proving extensive social security and a traditional gender-specific division of labour. Market competition and economic growth led to full employment and broad strata of the German population enjoyed increased spending power. The state was able to fund the development of an effective infrastructure through growing tax revenues. An undervalued currency improved the export opportunities of German industry, which developed its strengths in the areas of technically advanced investment and consumer goods underpinned by a qualified workforce. Reconstruction and the desire for higher standards of living were the driving forces behind economic growth; the risks of environmental damage were either not recognised or neglected.

The capitalist market economy was tamed by co-operative regulations in industrial relations. Employers and trade unions negotiated wages and working conditions in a framework of contractual freedom. Collective wage agreements guaranteed companies identical competitive conditions and strengthened the bargaining position of employees. Employment law and labour courts protected employees within companies and on the labour market. Corporate law and co-determination were regarded as the first steps towards the democratisation of the economy.

The German version of the welfare state was, and continues to be, geared towards preventing those in employment and their families from falling into poverty. For this reason, the collective social security systems are almost entirely connected to paid employment and are primarily funded through contributions from current wage income. In the event of unemployment, sickness or old age, it was possible to maintain roughly the same standard of living as in work. Steady economic growth and a high level of employment increased the scope for redistribution and guaranteed social benefits and

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services that covered more than the typical risks associated with paid employment and came to include education, housing and, most recently, parenthood and nursing care.

The German social security system was dependent on economic growth that could deliver full employment. Well into the 1970s, 'full employment' was equivalent to continuous employment opportunities for male breadwinners. The German social security model was, in principle, based on a gender-specific division of labour, which placed the main responsibility for maintaining the family on the shoulders of men, while women assumed prime responsibility for bringing up the children and doing the housework. The uninterrupted employment of men - over a period of 45 years - was as much part of the normality assumed by the German model as the social security entitlements it provided to married mothers and housewives. In contrast, the German Democratic Republic wanted to promote the equal integration of mothers into the world of paid employment. This was the basic objective of its social policy.

The Model Reaches its Limits

The model of the social market economy owed its plausibility and acceptance to the long reconstruction period, which lasted well into the 1960s. During this time, steady economic growth was accompanied by a rise in employment and the expansion of welfare state benefits and services. From the mid-1960s, mass prosperity and the progressive democratisation of society prompted socio-cultural transformations, similar to those in other Western societies. Thus, traditional relationships of authority between the generations and the sexes were called into question; gender and sexual norms were relaxed; and there was a growing emphasis on values connected to self-realisation rather than duty.

It was not only the life sphere of West Germans that was changing; the economic system, too, came under adaptive pressure. The shocks suffered by the world economy in the 1970s reduced the economic performance of the model. But the collapse of the Bretton Woods international monetary system, the two dramatic rises in the price of crude oil, the economic collapse and the massive rise in unemployment during 1973/74 and 1980/ 81 did not provoke corporate managements or public decision-makers to seriously change their course. On the contrary, the tried-and-tested instruments of the 'German model' were expected to continue to achieve steady

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economic growth and high levels of employment, although the international financial markets, which were now expanding at above-average rates, already began to limit the autonomy of national governments. The second half of the 1980s, in particular, which brought continuing economic growth and the creation of new jobs, saw a failure to foster structural change by cutting protective-conservative subsidies and by promoting innovation. Moreover, a fundamental reorientation towards an environmentally sustainable economy was not attempted.

The 'German model' was not strong enough to withstand the consequences of German unification. The manner in which the transfer of resources to the new Lander was funded brought the structural problems of the social security institutions clearly to light.

At the beginning of the 1990s, the performance of the German model, as it had evolved over the years, faltered. Several enormous changes coincided to overstretch the system: the end of the Cold War and the opening up of Eastern Europe to Western investment, German unification and its cost, the completion of the Single European Market and the creation of a global network of capital markets.

These developments resulted in an extraordinary intensification of international competition, which caused a sharp fall in industrial production during the economic crisis at the beginning of the 1990s. German companies reacted by rapid increases in productivity. Massive job cuts now hit the core of qualified employees. In public discussions these diverse changes are often referred to the ambiguous notion of "globalization".

Placing Structural Problems Centre-Stage

The Commission has examined the different aspects of globalization in some detail and has arrived at the following conclusions. Global competition has exposed the rigidities and structural deficits of the German economy. Adjustments are necessary that affect fundamental aspects of the 'German model'. The Commission therefore has developed important cornerstones of a new 'German model', which is as robust and internally consistent as the old model. There is, however, a danger in the current globalisation debate: over and above the real changes that are required, many call into question what continue to be valuable institutions of industrial society (such as industrial relations, vocational education and training, corporate organisation). The Commission does not see the challenges of increasing competition

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primarily in relation to developing Third World countries; rather, competition will increase sharply within Europe and may well lead to a decline in tax, social and environmental standards unless agreement can be reached at the European level.

In the debate about Germany as a location for economic activity the competitiveness of the German economy is often fundamentally called into doubt. Yet, empirical analyses demonstrate that the German economy has so far succeeded in defending its market shares in international competition. But its exporting strengths may conceal structural weaknesses which could compromise future opportunities for development. In the opinion of the Commission the debate on Germany as an economic location focuses too heavily on costs and neglects structural problems. We have, therefore, placed these structural transformations and the need for longer-term adaptation at the centre of our deliberations and recommendations.

The Federal Republic of Germany is not alone in grappling with severe locational problems. All its major industrial competitors and in particular several European countries, Japan and, despite all its success, the United States, are in a comparable position. However, they differ too much with regard to their starting points and contextual conditions to allow for the schematic adoption of foreign strategies or, even more so, the selective application of parts of their strategies. It makes no sense for Germany to enter into a competitive race of cost-cutting. Instead, it is important to reinforce existing successful diversification and specialisation strategies and to focus on products, services and systems whose success depends more on quality and novelty rather than price.

The Commission does not agree with the idea, often repeated in the globalisation debate, that nation states have lost their political capacity to take purposive action. We do not ignore the need for more European and multinational regulations, even if these confront extraordinary difficulties. Equally, we do not deny that the internationalisation of the economy has limited the scope for national action. At the national level, however, the scope of action of the Federal Government and the Lander, trade unions, employers, the academic community, political parties and the churches remain substantial. For this reason, we have concentrated mainly on political strategies that can be implemented nationally.

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Against Superficial Strategic Concepts: social and environmental dead ends

Current economic policy debates tend to throw up two different reactions to the problems of globalisation that point to two divergent paths of development.

The first path puts its trust in a radical cost-cutting strategy in an effort to maintain international competitiveness and to regain dynamic growth necessary to secure high levels of employment. This requires employees and their trade unions to accept wage increases below the rises in productivity or even the reduction of wages in real terms, in order to ensure that unit costs are lower than those of competitors. Proposals to unburden companies of wage-related costs, to reduce taxes on other production factors and to effect far-reaching cuts in profit-related taxes point into the same direction. The same logic underlies proposals for the abolition or significant relaxation of collective wage agreements, the deregulation of employment law, including the legal safeguards against dismissal, and radical increases in the flexibility of work organisation and working hours. The Commission believes that some of these demands make sense. Taken together, however, they would lead to a reduction both in nominal paid incomes and in tax revenue which could have negative macroeconomic consequences.

The dangers of a radical cost-cutting strategy to the social integration of German society are of even greater importance. If wage incomes decline and wage differentials grow, this will increase the risk to many low-income families and single low-skilled people of falling into poverty. Declining income opportunities and growing job insecurity will have a destabilising and discouraging effect on people's lives. Their readiness to engage in long-term partnerships and family relationships, to involve themselves in neighbourhood activities or charitable associations will decrease, should such a strategy be pursued. Short-term, predominantly interest-oriented relationships that reduce cost risks will dominate even more in people's lives. The opportunities to practice trust and co-operation will become rarer, drying up the sources on which a democratic political culture depends.

If at the same time the welfare state is denied the resources to cope with these poverty risks an growing part of the population faces social exclusion. This would particularly affect children in socially and economically disadvantaged families and young people with no vocational training. Without state assistance to get into employment, the latter would miss the entry into

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their working lives. As the US experience shows, illegal forms of coping with life's challenges would be the response. The social and political consequences of such developments are difficult to anticipate.

These problems are aggravated by the fact that the transformation process in East Germany is not yet complete; it is, instead, entering a new phase. This applies both to living conditions and mental orientations, i.e. the socio-political and cultural 'fall-out' of rapid unification. For example, the economic and social recovery of the new Lander has hit the buffers. This stagnation is not a short-term phenomenon, but reflects structural problems. We must, therefore, expect a long-term division in the German labour market to the disadvantage of eastern Germany. The economy in the new Lander is likely to be only at the beginning of a second, extremely long phase in the transformation process. The starting point of this second phase are the results of the first transformation phase. On the positive side, there is now a modernised technical infrastructure and a workforce whose qualifications resemble those in the West; on the negative side, there has been a dramatic decline in the industrial base threatening a crisis in the service sector and growing disparities in standards of living.

Conclusion: In the view of the Commission, a radical cost-cutting strategy points to a developmental path that leads into a 'social dead end'.

The second developmental path is associated with a radical growth strategy. It is dependent on an expansionist money and fiscal policy, but also requires instruments for controlling costs, if this proves necessary to prevent inflation. A growth strategy of this kind is, in particular, dependent on the removal of all obstacles to investment in an effort to increase and accelerate growth and job creation. Such an approach is, for example, consistent with proposals to relax current environmental law, to review current emmission norms, to avoid time-consuming environmental impact assessments and to abolish, or at least radically accelerate, approval procedures.

The Commission is sceptical whether a strategy of this kind would meet growth expectations. What is certain is that the deterioration in environmental conditions would not only harm the quality of life; it would also damage Germany's attractiveness as a location for research-, service- and human capital-intensive economic sectors. Most importantly, such a strategy would forfeit Germany's competitive advantage in environmental protection technology.

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Conclusion: In the view of the Commission, a primarily growth-oriented strategy leads into an, ecological dead end', because of its incalculable risks.

Economic Performance, Social Cohesion and Environmental Sustainability - Three Goals, One Path

The Commission suggests that the current problems faced by the German economy and German society can only be overcome by strategies that balance economic performance, social cohesion and environmental sustainability. At an abstract and theoretical level, this triangle of objectives might be consistent and uncontroversial. Yet, at present, many advocate that economic interests are given greater weight. Others strongly defend the priority of social cohesion or the preservation of the environment. It is, however, evident that the strict pursuance of any one of these goals without regard to the other two is self-defeating. For example, if economic performance alone is favoured, both the social natural bases of the and economy, in the form of social cohesion and environmental stability, are undermined. In the real world and when political choices have to be made, conflicts between these three goals are to be expected. The Commission favours creative strategies that can help to minimise these conflicts and to balance the three goals.

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Four Strategically Important Reform Projects

With this in mind, the Commission has selected four 'projects' to illustrate how forward-looking strategies can be developed that are economically, socially and environmentally acceptable. These strategies could again result in a consistent and robust 'German model' under the likely contextual conditions of the coming decades. Each of these projects is primarily concerned with one of the three main goals set out above. However, they are not only intended to achieve their primary objective, but also take account of the contextual conditions and requirements of the other two goals:

improving innovative capacity and strengthening human resources (Project 1),

• improving employment opportunities for the low-qualified (Project 2),

• change in the family and the employment crisis as a challenge to a policy of social integration (Project 3),

• environmentally compatible life-styles and forms of economic life (Project 4).

Project 1 'Improving innovative capacity and strengthening human resources' sets out to answer the question of how economic sectors that are exposed to international competition can maintain their competitiveness in Germany as a high-cost location. Against the background of a new type of structural change, we discuss the challenges that the need for the continuous improvement in the innovative capacity of the economy and the state poses to the organisation of research and development, the organisation of production processes, education and further training and the organisation of efficient public services.

In Project 2, the Commission seeks to 'improve employment opportunities for the low-qualified' by proposing structural changes in the welfare state. This Project addresses the tension between the requirements of a market economy and social cohesion. The Commission distinguishes between, on the one hand, employment opportunities in sectors of the economy that are exposed to international competition and those which serve local and regional demands, and on the other hand between employment opportunities for those with high professional qualifications and the low-skilled.

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Project 1 emphasises the need for improving innovative capacities and strengthening human resources as a precondition for maintaining competitiveness and high-skilled jobs in economic sectors that face international competition. At the same time, cross-national labour market analyses show that the structure of the German welfare state hinders the creation of new jobs for the low-skilled. About half of all the unemployed have either no job training or have never completed it; most of the long-term unemployed are low-skilled or difficult to train. In the eyes of the Commission, the long-term social exclusion of millions of citizens poses a serious danger to the democratic constitution of the country. The nation-state which remains responsible for employment cannot wait decades until rising standards of living and incomes in low-wage countries might eventually reduce competitive pressures on the commodities and jobs markets to an extent that allows for the reintegration of the low-skilled in the German job market. For this reason, the Commission puts forward proposals for the opening of a low-wage job market that is socially acceptable.

At the heart of Project 3, 'Change in the family and the employment crisis as a challenge to a policy of social integration', are the conflicts that result from the contradictions between current employment orientations and opportunities and the changing parameters of social policy. Women are now expected to be self-supporting, unless they have children or other dependent relatives at home to care for. A high female participation in education and good professional skills have meant that employment opportunities for women have increased significantly. Women want to be in paid employment and many want permanent, full-time jobs. On the other hand, the employment crisis has reduced the number of secure, well-paid jobs with career prospects for both men and women. This is particularly the case in eastern Germany where higher levels of female employment than in the West mean that households with two adults in full-time employment still represent the most common form of private life.

It is not just in the German model that the family is an important source for the production of welfare. Nevertheless, in the future - and as already happens today - the social security system will increasingly stress the link between individual contributions and service and benefit entitlements. This threatens to discriminate against those who are less integrated in paid employment or who are less available for it, amongst them many women. The Commission's proposals, therefore, concern the family, employment and social policy in order to reduce conflicts and to achieve a high level of

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social integration. Since women's outlook on and their participation in the labour market and private life styles in eastern Germany are different from those in western Germany, the Commission deals separately with the situation in eastern Germany.

Project 4. 'Environmentally-compatible life-styles and forms of economic life', describes the complex future task of how strategies for reducing the exploitation of the environment can be made compatible with the promotion of economic growth. It also discusses what changes to our life-styles and social behaviour would be necessary and possible if the environmental objectives are to be achieved. We discuss differentiated instruments of environmental policy and the opportunities for promoting environmentally-compatible technical, institutional and social innovations. To take account of the cross-border character of many environmental problems (such as damage to the ozone layer, climate change, the loss of biodiversity etc.), we also underline the need for the further internationalisation of environmental policy, which must include institutional reforms.

All the Commission's projects and proposals are guided by the intention to remain true to the objectives of the German model of a wider social market economy in the face of growing international competition and changing societal conditions. This will only be possible if the traditional structures of the German model are not defended at all cost. Thus, the Commission's proposals depart in many ways from the traditional solutions put into place during the post-war decades with the support of the trade unions and social democracy.

The Commission was unable to look in detail into all the areas it believes are of great importance. In particular, it did not consider suggestions relating to the reform of the contribution-based social security systems, growing distributional imbalances in the tax system or the untapped potential of private services in education, culture and health in which public provision has dominated up to now.

The Commission did not look at short-term issues addressed by current political debate in Germany. Instead, it wished to deal primarily with structural problems that will be of major importance in the future.