Learning from Germany

In just ten years, Germany has gone from being the sick man of Europe to being a role model that the eurozone's distressed economies are instructed to emulate. But there is much in the German model – particularly its neglect of service-sector reforms – that economies struggling to boost productivity should ignore.

BRUSSELS – Ten years ago, Germany was considered the sick man of Europe. Its economy was mired in recession, while the rest of Europe was recovering; its unemployment rate was higher than the eurozone average; it was violating the European budget rules by running excessive deficits; and its financial system was in crisis. A decade later, Germany is considered a role model for everyone else. But should it be?

In considering which lessons of Germany’s turnaround should be applied to other eurozone countries, one must distinguish between what government can do and what remains the responsibility of business, workers, and society at large.

The one area in which government clearly is in charge is public finance. In 2003, Germany ran a fiscal deficit that was close to 4% of GDP – perhaps not high by today’s standards, but higher than the EU average at the time. Today, Germany has a balanced budget, whereas most other eurozone countries are running deficits that are higher than Germany’s ten years ago.

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