Auf Wiedersehen Modell Deutschland?

The German Political Economy and the Challenges of the 1990s

By
My old Volkswagen
Auf Wiedersehen Modell Deutschland? : The German Political Economy and the Challenges of the 1990s - Frédéric C. Neumann-Schniedewind

Since the day of the currency reform, the policy of the social market economy has been guided by the idea of bringing personal freedom, growing prosperity and social security into harmony on the basis of a free competitive economy and of reconciling the peoples by a policy of openness to the world.

Ludwig Erhard, 1960

A New Angst

Germans are again going through one of those bouts of anxiety that hit them about as often as a trough in the business cycle. In the 1960s it was the Berlin Wall, in the 1970s it was the Baader-Meinhof gang, and in the 1980s nuclear weapons. Now, with the country unified, terrorists and cruise missiles gone, there comes a less familiar source of Angst: economic stagnation.

The figures speak for themselves: in 1997, unemployment reached a record level of 11.9%, which puts the total of Germans looking for jobs at 4.5 million, levels not seen since the days of the Weimar Republic.1 Over the last several years, government debt has more than doubled, leaving Germans struggling with the Maastricht criteria.2 After the unification-induced boom of 1990, economic growth slowed to a dismal one percent per annum.3 In manufacturing - the backbone of German industry - output was seven per cent lower in 1996 than five years previously, and the workforce has dropped from 11 million to 8.8 million over the same period.4

This kind of news is hard to get used to. Germany, after aH, is the country of the Wirtschaftswunder. Following the war, "West German society gave rise to a distinctive kind of capitalist economy, governed by nationally specific social institutions that made for high international competitiveness at high wages and, at the same time, low inequality of incomes and living standards."5 Annual increases of real GDP averaged 8.2% in the 1950s and 4.4% between 1960 and 1973.6 The German economic and social order was widely regarded as exceptionally successful: "the country was not only rebuilt in what was generally referred to as an economic miracle. Its economy developed to become one of the most efficient and productive in the world."7

But no more. The vaunted German model has run into trouble. A "dangerous combination of high wages with short working hours, rigid labor laws, risk-averse managers, overregulation and overtaxation" have turned the German miracle into the 'German disease.'8 In the 1990s, the social market economy (SME) "is unable to cope with a multiplicity of demands on its resources and is weakened by a combination of low domestic demand, intensified international competition, demographic problems and structural difficulties exacerbated by the legacy of unification."9 Germany's economic institutions simply lack flexibility and fail to promote innovation.

In short, German capitalism has lost its appeal. Abroad, countries in search of an ideal no longer seek to imitate the 'Rhine model.' The Poles, for example, now look to Anglo-Saxon capitalism for inspiration. At home, it is slowly dawning on the Germans that the old ways need mending. Globalization, it is held, undermines the foundations of the social market economy. A recent book The Global Trap proved an unexpected bestseller.10 Recommendations range from isolation to the abandonment of Lederhosenkapitalismus (traditional German business practices) and the adoption of American cowboy capitalism.

What's wrong? Does the social market economy still have a chance in today's global environment? Or are the days of the German model numbered? What are the alternatives? This essay will, first, identify the major elements of Germany's political economy. Second, it will elucidate the exact challenges. The third part will depict the responses to these threats and point to possible solutions. The conclusion will briefly comment on the role of the state in the postwar period and in the future.

Don't Take Two for One

The French fiddled with state planning, the British believed in public sector spending, Americans allowed laissez-faire, and the Swedish sought labor market regulations while the Japanese juggled industrial policy. Over the postwar period, countries have not converged along a common path of neoliberal modernization. Rather, in advanced capitalist societies "firms are embedded in distinctive social systems of production which have emerged from different institutional trajectories."11 Germany's success, it is argued, is based on decentralized state power within a highly centralized civil society.12

But to sum up national models in catch-phrases is to ignore change. Though some unique features of Germany's economic order have persisted since the war, most have changed so fundamentally that it is necessary to speak not of one but of two German models. From the currency reform of 1948 to the mid-1960s, a CDU-led government pursued "an 'organized' supply-side policy, biased in favor of industry" and created a "welfare state that provided a partial cushion for those not favored by the dominant economic policy."13 In 1969, the SPD-FDP coalition introduced a new form of German capitalism that is still around today. Here the emphasis is on macrocorporatism with more regulations and consumer oriented policies. The continuity and change of different elements characterizes Germany's postwar economic development.

Two central components of German capitalism have prevailed over the last fifty years: competition and monetary policy. After the war, officials believed that "the state is obliged to provide a constitutional or statutory safeguard for competition to protect it against the excessive powers of monopolies and cartels and to guarantee fair performance­ based competition--which alone is able to bring about at least a tendency for individual and common interests to coincide."14 The 1957 Act Prohibiting Constraints on Competition set up an independent cartel office, and even came to be "regarded as a basic law of competition, comparable in importance to the constitution."15

A second law in 1957 erected the Bundesbank. Charged with protecting the currency, the autonomous central bank demonstrated the credibility of German anti­inflation policy by establishing a reputation for toughness.16 Germans became inflation hawks not only as a legacy of the hyperinflation of the 1920s, but also for social and political reasons.17 Strict control of the money supply also served as a built-in economic stabilizer, "which would eliminate cyclical fluctuations by means of signals to investors provided by an efficiently operating price mechanism."18 Moreover, low inflation helped to keep wages in check, and a strengthening Deutschmark guaranteed permanent competitive pressure on exporters.

What the Bundesbank and the Federal Cartel Office have in common is that they are independent authorities insulated from electoral pressure. Objectives like "monetary stability and competitive markets are in this way removed from government discretion and depoliticized."19 This largely explains their policy consistency since the war. However, the other four dimensions of the German economic tradition--state intervention, social citizenship, industrial partnership, and corporate finance-have undergone fundamental change. This is partly due to political meddling and partly to weak institutionalization.

During the first decade and a half, economic policy followed 'ordoliberalism', the notion of a limited state that frames general rules but refrains from intervention. As advocated in the writings of Ludwig Erhard and others from the Freiburg School, the doctrine held that the state should remain a neutral player in the market, allowing only moderate redistribution through progressive taxation and providing just elementary social welfare." Erhard's firm personal aversion to state intervention or to collusion in the economy held sway, especially because he was Economics Minister but also because it represented a consensus. His revulsion to state intervention and to monopoly or oligopoly were all the more accepted because they represented a reaction to the Nazi state and to its industrial collaborators."20

This, however, began to change in 1966 when the SPD came to power. Schiller's Globalsteuerung (universal control) and Konzertierte Aktion (cooperation) stressed fiscal policy and government direction--via influence rather than decree -as the main tools to control macroeconomic performance. Perceiving a widespread desire for more welfare and stability, the SPD became "an eager advocate of innovations that would strengthen the government's capacity for reconciling these two goals."21 Increasingly, the German state also became involved in the affairs of industry. "The growth of state intervention is evident firstly in the steady expansion of subsidies to industry. Moreover, state funds have played a growing role in the most critical processes of industrial restructuring -technology development and transfer - and labor force skill development."22

From the outset, the role of the state in the social market economy was to ensure a welfare system for those who might have fallen by the wayside in a totally free market system. But emphasis shifted here as well. Initially, policies were based on a Christian Democratic approach which pointed to "state responsibilities whilst upholding broad liberal preferences for self-help and the family. "23 From the late 1960s onwards, consecutive SPD and CDU dominated governments expanded welfare provisions. The definition of SME gave more and more weight to the word 'social.' The figures reflect this: While in 1950 social expenditure of total public outlays accounted for a mere 25 percent, in 1994 it was about half.24

Another crumbling pillar of the German model is the spirit of consensus between labor and capital. Co-determination was introduced in 1951 to develop cooperation between management and employees. In the name of social peace, workers were given a voice in supervisory boards and through work councils. Though this arrangement worked well in early years, it soon created confrontation. Work councils started to engage in "considerable supplementary pay bargaining on an informal basis." Moreover, the councils tried to increase their "bargaining activity to protect constituents from technological change and organizational and managerial innovations."25 Similarly, consensus gave way to conflict in sectoral wage bargaining. The strike intensive years of 1978, 1984, and 1994 confirm that "the outstanding appeal of German-style social peace was gradually lost."26

In Germany, 'stakeholders' not only include employees but also banks. Traditionally, financial institutions assumed key posts on supervisory boards, wielding their power through direct or proxy shareholding. Consequently, a tradition of loan rather than equity financing of industry developed. This system had the advantages of stabilizing the German corporate structure, promoting long-term planning, and avoiding take-over battles. Yet over the last two decades, the role of banks has declined because of a reduction in their shareholdings and the development of deeper capital markets. The ten largest institutions have lowered their participation in German corporations from 1.3% to 0.4% in 1994.27 Increasingly, the culture of 'shareholder value' is taking hold.

In conclusion we can see that some important ingredients of the German model have persisted over the postwar period. Apart from its consistent commitment to low inflation and fair competition, "the German political economy continued to allow for decentralized compromise and local commitments supplementing, underpinning and sometimes superseding the high politics of class accommodation at national level."28 However, the original doctrine of the Freiburg School on which the SME was based also underwent considerable change. Social welfare legislation "advanced further than Erhard wanted" and "the government became an instrument for the preservation of existing structures rather than a force for renewal. It stepped into the arena ever more frequently to favor one or another established player or groups of players."29

It is striking that those elements which were subject to political influence or were weakly institutionalized underwent change while others remained stable. Up to the mid­-1960s, CDU-led governments approached state intervention and social welfare differently than did later coalitions.3 0The role of work councils, trade unions, and banks also changed considerably due to a lack of formal structures.31 However, at least in the political realm, "reforms have been constrained by the institutional context of policy-making" which ensured a degree of consistency.32 ln 1974, as a case in point, the Bundesbank put an end to any Keynesian temptations by reaffirming that "it would do all in its power to keep the inflation rate down," offsetting the effects of expansionary fiscal policies with high interest rates.33

Globalization vs. Gemütlichkeit

This inherited German model of capitalism, with all its components, faces rising and cumulative pressures in the 1990s. This stems partly from new international commitments such as the European Monetary Union, the stabilization of Eastern Europe and Germany's quest to play a more important role in the UN and NATO. Partly it can be linked to the burden of reunification. Most importantly, though, the difficulties derive from developments in the global economy. In general, "it is not at all clear that the German model provides German actors with the means to deal effectively with this pressure."34 The result: a profound policy dilemma for the Federal Republic.

The costs of Germany's latest international obligations are negligible compared with the scale of funds needed to achieve German unity. Gross transfer payments from the West represent about fifty percent of East German GDP every year, and "net transfers for the period 1991 to 1996 total[led] more than DM 930 billion." As a consequence, the budget deficit rose from one percent of West German GDP to 6.2% in 1993, income taxes went up by 7.5% due to the contentious 'solidarity surcharge', and harsh funding cuts trimmed public services and investment spending.35 Moreover, non-wage labor costs jumped from 35.6 percent in 1990 to a record 41.7% in 1997.36 Thus, by the mid- to late-1990s, Germany was engaged in the largest wealth transfer in economic history--which inevitably proved a drag on competitiveness.

But it would be wrong to blame unification alone for Germany's economic woes. Developments since 1989 may have exacerbated the institutional problems inherent in German capitalism but they did not create them.37 Already before the fall of the Wall, the model had hit its limits with regard to product leadership, labor market flexibility, and cost cutting. It had "slowly begun to deteriorate into a pattern where socially instituted markets, negotiated management, structurally conservative politics, quasi-public associational governance and cultural traditionalism resulted no longer in industrial upgrading, but in an ever-expanding number of people being relegated to an ever more expensive and, ultimately, unsustainable safety net in the widest sense, being kept out of employment at public expense, or in employment at private expense."38

By far the greatest challenge for the German model is globalization. It may seem paradoxical that an economy which is so successful in world markets would be threatened by global competition. In fact, measured by per capita exports, Germans are still number one in the world, ahead of both Japan and the United States. But it is precisely here that one of the key problems lies. Because of its reliance on exports, the German economy becomes more vulnerable as international competition intensifies. New competitors, especially from East Asia and Eastern Europe, squeeze margins for manufactured exports while newly profitable markets are not captured by German companies due to a lack of innovation. Hence, Germany's share of world trade dropped from 11.5% in 1991 to 9.9% in 1996.39

It is easy to exaggerate the consequences of globalization.40Its impact, nevertheless, is real. The process involves an "increasing integration of international markets being brought about by rapidly expanding worldwide flows of goods, services, capital, information, and sometimes people."41 It also comprises post-Fordism, a shift from mass production to flexible specialization in both products and production processes as a result of accelerating technological change. By dramatically increasing the mobility of factors of production, the new global economy places "a premium on speed of decision, reduction of costs, flexibility of employment and working practices and more innovative methods of raising capital for new ventures, and more internationally experienced managers."42 All these developments raise serious questions about the continuous effectiveness and viability of the German model.

Even one of the most constant elements of German postwar capitalism, competition, is in jeopardy. Domestic authorities find it impossible to regulate corporate takeovers and strategic alliances by multinational companies. The Federal Cartel Office, for instance, was unable to stop the merger between Boeing and McDonnell-Douglas which "created an aircraft manufacturer likely to dominate the world market."43

Though it is debatable whether globalization entails 'the erosion of the state,' there is no doubt that the process requires a redefinition of the government's role in the economy.44The success of the German model was in some measure conditional upon "supportive as well as directive public or quasi-public intervention, inevitably organized at national level and dependent on a capacity, vested in the nation-state, to police the boundaries between the national economy and its environment."45 But as borders have vanished, extensive subsidies to industry, together with the attendant increases in taxation and the state's share of national expenditure have become self-defeating. Faced with levies of up to 53 percent of their revenues, firms simply wave goodbye, taking 300,000 jobs with them.46 German foreign direct investment reached DM 50 billion in 1995, with none coming into Germany itself.47

Companies also leave for a second reason: wages. At hourly pay rates of DM 45 in manufacturing, Germany has unit labor costs that are 25 percent higher than those of OECD competitors while working hours and machine-running times are the shortest.48 The German commitment to social cohesion led to rising non-wage payments which have been "increasing faster than net wages ever since the seventies. "49 In the past, upward wage pressure served the German economy well: an incentive for the introduction of capital ­intensive manufacturing techniques and the production of high value-added goods. Today, however, an imbalance between productivity and labor remuneration leads to an outflow even of high-skill jobs. Eastern European countries, for example, now supply German companies with a low-paid and educated workforce, close enough to be included in just-in-time production.

Germany's 'high road' to economic success is also endangered by new management methods. Conquering niche markets was the cornerstone of this strategy. The costs arising in the socially circumscribed labor market have discouraged price-competitive production and compelled firms to seek survival with quality-competitive goods. But lean production has changed all that. Integrated quality control, synchronized inventory systems, and team work are designed to make quality products cheaply. Hence, the "juxtaposition between a high and low road of economic success looks increasingly invalid." With the global spread of flexible, post-Fordist patterns of production, "the business logic that allowed the German model to operate in an orderly and stable manner is rapidly washing away."50

In addition, lean management strikes at the heart of German industrial partnership. It erodes the traditional sectoral pay bargaining process by weakening the craft model of employment. Team work has contributed to the disappearance of individual autonomy, the significance of specific skills, and the high level of task identity enjoyed by craftsmen. This in turn dents the idea of "craft workers enjoying pre-contractual employment rights--the notion that association with a particular skill ensures that a worker enjoys a relatively autonomous working environment and high social standards irrespective of the employer for whom he or she works." Rather than deriving their status from being a member of a particular craft community, "the skills and career path of workers are now more intimately tied to the individual enterprise."51 As a consequence, employees (and employers), faced with mounting competitive pressure, increasingly opt out of centralized wage fixing and seek plant-level solutions.

Just as German labor needs to adapt to global factor mobility, so does' capital. Over the past ten years, "German banks were pulled into world credit and securities markets while German corporations came under international regulatory pressures to shift to US ­style accounting, or to open Frankfurt bond and equity markets to non-German institutions."52 The internationalization of finance enfeebles the hold that German banks have over the credit supply to companies, weakening their capacity and motivation to monitor company performance and to promote prudent long term corporate strategy. For instance, Daimler-Benz, now DaimlerChrysler, took the historic step in 1993 of listing its shares on the New York Stock Exchange. As national boundaries wither away, the relationship between German banks and companies will become less intimate and more market driven.

To be sure, not all German companies lose out in the global economy. Large conglomerates have especially profited from the opportunity to escape over-regulation and the tax burden at home. "German big business has been demonstrating its disillusionment with Modell Deutschland by channeling increasing volumes of wealth- and job-creating investment beyond the country's enlarged borders." However, together with the domestic cost-cutting and rationalization drive, "the result is a progressive de-coupling of the performance of the domestic economy with that of German companies increasingly set upon globalization."53 What is good for Siemens is no longer necessarily good for Germany.

It seems that what the global economy demands, the contemporary version of the German model cannot offer. Flexible labor markets and low production costs are the key to success, but both are presently lacking. And it also seems that globalization is set to put central elements of the German model at risk. Without reform, it will not prove competitive nor will it survive. Competition and monetary policy, collective bargaining, and the Hausbank arrangement are unsustainable in their current forms.

Back to the Future

In their attempt to save the German model, policy-makers have engaged in an 'export-import' strategy. On the one hand, they try to extend certain features of German capitalism to neighboring countries and international organizations. On the other hand, officials strive to accommodate German institutions to the imperatives of the global economy. However, it is questionable whether reforms have been sufficiently far-reaching. Institutional inertia seems to impede progress. What is lacking is a new sense of direction and a better understanding of how to respond to the challenges of globalization.

Again, it is remarkable that the two most persistent elements of the German model have been successfully spread to the international sphere. To compensate for the emerging impotence of national authorities to effectively regulate strategic corporate behavior, the Germans, "in coalition with the British and against the French, succeeded in extending their competition regime to the European Community."54 The same goes for monetary policy. Over the 1980s, the Bundesbank exported low inflation to members of the EMS. In the 1990s, this policy has taken on a more radical form. The European Central Bank in Frankfurt, modeled after the Bundesbank, has as its overriding preoccupation stability for the new single European currency.55

Efforts to Europeanize German industrial partnership, however, have come to naught. Proposals to introduce a corporatist-style tripartite consultation (Konzertierte Aktion) in European Union decision-making have failed, as have proposals to encourage European-level work councils.56 Attempts to export the SME's social dimension have proven more successful. The Bonn administration wants to make laws in the EU "consistent with the thrust of postwar German industrial relations which had resulted in a high level of protection for German workers." Apart from a non-binding social charter, "the German government also supported inclusion of social policy in the Maastricht treaty, and won a curious agreement to apply qualified majority voting rules and use EC institutions to harmonize social policy among all EC members but the UK."57

The Union not only serves as a vehicle for exporting policies, but it also helps to precipitate adaptation within Germany. In fact, "the main source of new thinking on deregulation comes from outside: the European Union has proven a valuable force driving forward liberalization, providing the impetus behind important measures in transport, telecommunications and financial services."58 EU deadlines to implement single market legislation, for example, stimulated market liberalization in investment banking. In the 1980s, the government was against any 'Big Bang' experiment. "This aversion was rooted in Bundesbank opposition to the development of money markets, and in the practice of corporate-bank-insurance cross-shareholding among Germany's big publicly listed corporations."59 Yet the need to comply with new European standards forced Germans to open their finance sector to international competition, a move that in the long run may even reinforce Finanzplatz Deutschland (the concept of Germany as a favorable location for the financial industry).

But constructive change in Germany is still painfully slow. Part of the trouble is caused by one of the most important traits of the German policy style: the search for compromise. "German policy makers prefer non-decisions, incrementalism and the middle ground to radical change and zero-sum games and they believe in long-term solutions."60 This may in the past have had its advantages as it promoted a relatively stable business environment. "The politics of West German economic policy has constrained the radical experimentation with either a strong dose of Keynesianism (as in France between 1981-83) or a strong dose of supply-side economics (as in Britain since 1979)."61 In the 1990s, however, decisive action is required. "The excuse of 'social consensus' is too often used in flabby defence of the now unaffordable status quo. The system of checks and balances needs loosening to help Germany keep up with ever niftier foreign competitors."62

Germany's shopping hour regulation is an instructive example of the country's sloth-like adaptation to change. Only recently was an amendment introduced to the law obliging retailers to close their shops at half past six in the evening at the latest. The German government and trade associations, in the name of cooperation, took decades to reach an understanding. Discounting the job-creating effect of extending store-opening hours, trade unionists argued that "the right of 2.7 million retained employees to go home at the weeknight closing time of 6:30 P.M. clearly outweighs the desire of a few individuals to shop in the evening."63 This case underlines the constraints on policy innovation in the Federal Republic. Unless reforms are exacted from outside, the consensus approach will stifle change. German politics tends to grind down "radical policy initiatives so that the end product, if one emerges at all in the form of an authoritative decision or policy output, represents the lowest common denominator between those corporate actors which command the potential to crush the initiative completely."64

Nonetheless, it remains true that this arrangement has one outstanding advantage. If all relevant political forces happen to agree on certain objectives then the necessary adaptations can be quickly enacted. Thus, the current policy immobility may stem as much from the institutional context as from the absence of a vision as to where the transformation will or should lead. "The German inclination to prefer cooperation to competition in policy making was based on unprecedented postwar economic success and a broad based consensus on the welfare state. What we witness today is increasing controversy over what policy makers should achieve. The task of finding compromise has become much more difficult."65

While Germans do not have a clear idea about where globalization is going to lead, they do, in fact, have a model at hand that should offer guidance and enable them to confront the new challenges effectively. Looking back over the past fifty years, it becomes clear that the first version of German postwar capitalism holds some of the answers to today's questions. The ideas of the Freiburg School are as valid now as they were during the Wirtschaftswunder of the 1950s. Only performance-based competition regulated by a government-ordained framework will provide the flexibility necessary for success in the global markets of the 1990s. If Standort Deutschland (Germany as a business location) is no longer competitive it is because these principles were compromised over the years.

In other words, it is back to basics. The original German model has at its core a system of competition. "As such it aims to link market freedom and market efficiency with compensatory welfare, whilst retaining the maximum degree of individual freedom. That does not mean a maximum of social policy, but rather requires the basic principles and the overall framework to be shaped in such a way that social justice can evolve out of the system."66 The state should not be a burden through excessive taxation and intervention. Instead, its task is to create an enabling environment for business through a comprehensive yet 'neutral' structural policy which is oriented to objective yardsticks and overall societal goals.

Innovation is a good example of this. Germany, once a pioneer of science, is rapidly losing its technological edge which is so important to its high-wage economy. "In microelectronics the number of German patents between 1987 and 1992 shrank from 289 to 181, while Japanese registrations have risen from 17,408 to 23,082. The USA, with a doubling of its patents from 848 to 1,671 (over the same period), is substantially better off than German enterprises." And there are "similar lags in large computers, communications electronics, office technology, and lasers."67 Clearly, the German state has neglected its job of providing structural support to enterprises. Not only have successive governments rearranged their priorities and slashed public R&D and higher education funds since the 1960s, but they have also generated a chain of legislative restrictions which have proven to be an increasingly insurmountable obstacle to innovation. To engage in effective research in biotechnology, for example, is virtually impossible these days.

To call for a (partial) return to the policies of the 1950s is not to advocate laissez­faire. In verba magistri: "It is wrong to regard the Social Market Economy merely as a variety of neo-liberalism. Whereas neo-liberalism regards the machinery of competition as the sole principle of organization, the concept of the Social Market Economy has grown from different roots. These lie in dynamic theory and in social anthropology, both of which were developed in the 1920s under a different view of the State and a development of the concept of a way of life that was largely rejected by neo-liberalism."68 It is the original principles of 'ordoliberalism' and the successful policies of the early postwar years that Germans need to look to for inspiration. Moreover, it is here that they will find the broad consensus needed to implement far-reaching reforms.

Not Quite Dead Yet

At first glance it may seem that the global economy is slowly forcing the state's obsolescence. Over the last fifty years or so public spending has taken an ever increasing share of national GDP while the government has been busy telling people and businesses what to do, or, rather, what not to do. Yet in the 1990s, with the inadequacy of national institutions laid bare, things have changed. Tasks are being transferred to the sub- or supranational level and the state is being told by its citizens and firms to cut back. Susan Strange puts it as follows: "state authority has leaked away, upwards, sidewards, and downwards. In some matters it seems even to have gone nowhere, just evaporated. The realm of anarchy in society and economy has become more extensive as that of all kinds of authority has diminished."69

It is not quite that simple. In the age of globalization, the state will probably be relied upon more than ever. In the words of Ludwig Erhard: "wherever society fears mistakes or dangers in a development, it can set limits or create rules via social, economic or fiscal policy action—indeed, in times of need it will have to do so."70 Expect the state to adapt, not decay.

In the late 1990s, therefore, the choice facing Germany's government is that between 'defensive' and 'offensive' intervention. Should the state erect barriers that will shield the domestic economy from the onslaught of the presumably ineluctable forces of globalization? Or should the state embrace the global economy and help domestic firms compete internationally? The answer is, in short, that the national economy must withstand the test of international competition. The current version of the German model, however, seems unable to handle the task. Instead, a return to the original principles of Germany's much vaunted social market economy would mark a promising start. Auf Wiedersehen Modell Deutschland.

References