Taxes In Germany

One of the first things that the new government in Germany should do is incorporate across the board tax cuts. Consider the following analogy between the United States in 1979, and Germany in 2005: Record unemployment, extremely low consumer confidence, high interest rates, an ideologue left-leaning president/chancellor. The similarities are really quite ironic.

Gerhard Schroeder is the German version of our own Jimmy Carter. It is quite obvious that today’s Germans are feeling their very own version of a “malaise of low expectations.” Angela Merkel will have to be a modern day Ronald Reagan to restore any hope of another German Miracle. Germany’s economy though, is nowhere near as sickly as the US economy in 1979 was. Reagan restored America’s fabled optimism and the innate can-do attitude that many feel is uniquely American.

Merkel must be very careful not to get too political. She cannot simply sit pat on her current poll numbers. Even though the political tendency would surely be to ride it out while trying not to say so much that she might lose support. Reagan campaigned on lowering taxes, and that was indeed his first initiative after becoming president. He reduced the top rate at the time from around 70% to approximately 35%. He proved that his guiding principles meant more to him than his political standing, as this was not a very popular movement at the time. Remember, that the Democrats controlled congress during Reagan’s presidency. President Reagan stuck to his guns, which is exactly what Angela Merkel must also do.

Does the German population have the stomach for this painful dose of medicine? We shall soon find out. As often happens with the type of lack of leadership we now see in Germany, the population is surely extremely confused about its own government.

A year ago, we read about the 2010 reforms and about sweeping reductions in income tax in Germany. And now, the current government has developed an approach which is a 180 degree change from just 12 months ago. The new plan is to incorporate a 3% increase of income taxes on the wealthiest of Germans. This is totally nonsensical. Who does Schroeder believe will be hopefully providing new jobs in Germany? Of course it’s the wealthiest Germans who would have a chance to do this; not labor unions. Three months ago, his plan to reduce unemployment was to increase federal spending on infrastructure projects. No talk of increasing private sector activity, we’ll just build some tax-payer financed sections of the autobahn, and “bang,” new jobs will be created. This is totally ridiculous. The German left just does not get it. We shall soon find out how far to the right the CDU/CSU is from the SPD/Greens. Fiscal conservatives will be watching very interestingly when we see the so-called conservatives running Germany.

Wanted: German Leadership

The current German government is heading for a similar fate as their American brethren: The Democrats. “I am not convinced” and “We disagree with what you are doing” are not political platforms or substantive foreign policies.

Earlier this week Joschka Fischer lamented over the current EU problems with astoundingly profound leadership. “Either the Europeans come together or we will stay weak,” Fischer told reporters. He also indicated a concern that globalization is fuelling European unemployment. This is like saying that globalization is preventing Coca Cola from realizing profits. Germany is a huge exporter; perhaps one of the worlds largest. In truth, where would Germany be without globalization? A society of entitlements is what is, more than anything else, fuelling Europe’s unemployment!

Fischer also continues to blame Britain and the Netherlands for the failure to agree the EU budget, trumpeting that their inflexibility torpedoed a compromise designed to fund the integration of the union’s new eastern European members. He said Europe needed “creative” solutions to the crisis, but made no concrete suggestions. This is clearly just politics; in other words Fischer is making an effort to pit the Eastern members of the EU against Mr. Blair. Slovenia’s leader already has backed the statements by Blair in his EU address in hopes of achieving long-term reforms (THIS is flexibility).Integration costs are a huge part of why Germany’s economy is in the tank (see previous post). To my friend David, over at Dialog International: even Joseph Joffe is referring to Germany as the “sick man of Europe,” so this is not a fabrication of the NeoCons.

Speaking at a conference on Iraq being co-hosted in Brussels by the U.S. and the European Union, German Foreign Minister Joschka Fischer warned there would be a "high price to pay" if the democratization process in Iraq fails. What is he willing to contribute to this process to ensure its success? So far…nothing! This is not leadership.

Let’s hope that Frau Merkel has the political guts to lead. Most people know that she stands for an opening of the markets, and a scaling back (albeit, only slightly) of social security. The real question is perhaps, is the German population willing to be led where they don’t want to go, but hopefully realize they must go? Joseph Jaffe was recently quoted in IHT: "Germans are beginning to understand that what Chirac and Schroder have been telling them is wrong - that if we turn Europe into a Maginot Line against globalization, it will somehow protect them." Let’s hope he is right, and that we can look forward to better relations starting in September!

The EU Blame Game

With the collapse of the EU summit this week, a somewhat predictable and ugly blame-game has erupted. France and Germany have come out to blame the UK and the Netherlands for the breakdown. It is an unfortunate display of what can only called a “lack of unity” for the Union.

Germany should be careful in it’s communications, and should distance itself from the Franco-German alliance of the past several years. By aligning it’s position with the French, the accurate and understandable complaint by the Germans can only be demeaned.

It is generally ridiculous for Mr. Chirac to deplore the "arrogance of several rich countries" in the talks. Seems a bit like the pot calling the kettle black. According the EU commission, France is a net giver to the union to the tune of 1.9 billion Euros. The Netherlands gives at 2.0 billion Euros and the UK at 2.8 billion Euros. The GDP of France is roughly the same as that of the UK, and roughly 3.5 times larger than that of the Netherlands. You can see the hypocrisy of Mr. Chirac’s perspective.

The problem with Mr. Schroeder’s argument is ONLY that he makes it in concert with his friend from Paris. You see, the GDP of Germany is roughly 1.4 times larger than the GDP of both France and the UK. However, Germany is a net giver to the European Union at a rate of 7.7 billion Euros. Clearly, Germany is getting the shaft with respect to the entire EU budget problem. If Gerhard Schroeder is to make a plea for righting this inequity, and I believe that he should, he should also be making it to Jacques Chirac. He needs to muster enough independence from the Parisian to make his point on his own. As the argument has been made so far, one could not blame the Dutch or British from feeling as though they have been bullied by some sort of pre-planned French-German “cartel.”

Many German newspapers got in line last week to blame the UK for “killing the EU.” Der Spiegel describes the commentary from The Financial Times Deutschland:

"Many people have forgotten that for a long time, Chirac had fought against the idea of holding a referendum in France over the constitution.... Chirac knew that a referendum would not only be a vote on the constitution but also a vote for or against globalization, for or against Poland, for or against the EU and above all: for or against him." The commentator claims that it was only when Blair shocked his own cabinet by announcing that a referendum would be held in Britain that Chirac was forced to follow suit. Blair's aim, the paper says, "was to defuse the Europe issue, always a thorny one in Britain, in the run-up to the election." Although the writer does not explain exactly why Chirac had to copy Blair (after all, Germany didn't), he says that "the (British) Prime Minister cold-heartedly sacrificed the EU constitution project for his own domestic advantage."

As I have indicated, Germany definitely has a valid point when it comes to EU budget discrepancies, but to assess blame in a never-ending outward fashion is unlikely to correct any of it’s ills!

The Cost of Security and Freedom

Since 9-11, the United States has re-focused its energies toward national security. The Department of Homeland Security was established in part to facilitate greater control and communication amongst various federal agencies. Of course, appropriations for the purposes of national defense have increased sharply in the last several years.

Americans are more than willing to bear the costs of these programs. As John F. Kennedy said during his inauguration speech, “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.” Europeans in general (and Germans in particular) seem more willing to fight for free university education (see previous post) than for “freedom” itself.

A recent article in Der Spiegel, by Georg Mascolo ridiculed the massive amount of money that America spends on security and defense. He also made a keen connection to the “lucrative business of security.” Clearly this is intended to continue the anti-capitalism focus in Germany.

The business of fear in the United States of America has been booming ever since September 11, 2001 and the price tag for the protective cordon of high-tech gadgetry intended to keep the US safe from more terrorist attacks is enormous. Devices designed to detect nuclear material in shipping containers will cost the US government $300 million. The budget for the American Shield Initiative, a plan that calls for monitoring the country's borders with sensors or drones, comes at the hefty price of $2.5 billion. A further $10 billion is budgeted for a new computer system designed to monitor visitors, while outfitting all 6,800 aircraft in US commercial aviation with anti-missile systems will cost about the same amount. The total 2005 Homeland Security budget weighs in at a whopping $50 billion -- roughly equivalent to the gross national product of New Zealand.

Germany’ defense spending has been at or less than 1.5% of GDP for the last several years, and the Schroeder government has made regular cuts in this area of spending since gaining control of parliament. At one point during the Clinton administration, Germany’s level of spending in this area was less than all other NATO member nations with the exception of Luxembourg. By comparison, defense spending in the US has been in excess of 4% for years.

How can Joschka Fischer seriously expect the American government to be enthusiastic about their plans for a permanent seat on the UN "Security" Council?

The German University System

Germany’s educational system is being hampered by it’s inability to provide top-notch universities. The Times Higher Education Supplement recently published it’s list of the top 50 universities in the world. The top ranked German institution was Heidelberg University, which was ranked 47^th.

Gerhard Schroeder came out with a program designed to institute the development of elite universities in Germany. He seemed to want various existing universities to compete with each other, to begin the process of developing a competitive edge. Of course this set off many alarms with the media and within Schroeder’s SPD. Per a Deutsche Welle story:

Most point out that many German universities are already in shambles owing to a dire lack of funds, overcrowding in lecture halls and poorly equipped libraries and laboratories and that an elite university would only exacerbate the problems. Others point out there’s no tradition in Germany of foundations and endowments such as those that fund American elite universities. The German Research Foundation (DFG) has calculated that at least a €100 million would be needed every year to bring a part of German universities up to top-notch international standards, an impossible feat considering Germany’s poorly-performing economy.

The various student groups also have predictably set up many protests against the institution of even modest tuition fees at university. Students in Berlin actually went on strike to protest possible tuition fees. This is not something likely to happen when the students are paying for the ability to learn at a university. Why does this seem to only happen when a free studies are threatened?

Are Germans in general not willing to invest in their personal futures? It has long been suggested that the German culture is very reluctant to take on debt. DW also reported:

Judith Graff, a fourth year student at the University of Cologne, sees the loan issue from a practical standpoint. Sure, her studies have been prolonged by the fact that she has to work 20 hours a week to make ends meet -- and that's without having had to pay any tuition fees. But she would rather not finish school in debt.

"Everyone knows right now there are no jobs in Germany. How would you pay the loan back?" Graff asked. "If people come out of school with debt then they would hesitate to start a family ... it's a bad cycle.

Getting back to the overall university rankings…The United States, with all of its capitalistic “abuse” of higher education, and all of its outlandish tuition fees absolutely dominates the Times’ top university list. With the top four institutions of higher learning, and seven out of the top ten, the facts are pretty clear that market-based competition in general produces better results. Weather this is based on higher pay for better professors, or better facilities, or simply attracting the best students, really doesn’t matter because all of these market-driven competitive forces clearly produce results.

The conservatives in Germany, who now control 9 of the 16 state governments are more likely to support fee based tuition at the university level. Hopefully the population will come to understand that anything worthwhile requires sacrifice, and is not merely a “hand-out” to be expected and taken for granted.

Holding Out Hope on Iran

While the European trio of France, Germany and Great Britain have been apparently continuing negotiations with Iran regarding their nuclear ambitions, the news of progress has been quite limited. After all, the EU3 initially began negotiations with Iran in November of 2003, after what the Atomic Energy Agency referred to as a policy of concealment.

These negotiations have resulted in two agreements thus far. In October of 2003, Iran agreed to suspend fuel-cycle related activities at certain sites. Iran has signed, but not enacted this agreement. The question of why does it take so long for ratification was muted by their activities which the EU3 felt violated the spirit of the agreement. This was followed by more negotiations, which led to the November 2004 agreement. Apparently this later agreement essentially improved the language of the first.

As part of these ongoing negotiations, the EU3 also offered what could be termed a “unilateral” carrot by offering to usher Iran’s reinstatement into the World Trade Organization. Iran eventually declared it would end it’s suspension of activities outlined in the 2004 agreement, before reinstating the suspension…around and around we go. The United States, and the Bush Administration has been on the sidelines during all of this diplomacy.

Fast forward to this February…President Bush met Gerhard Schroeder in Mainz where they advertised a unified front; both proclaiming that Iran must not maintain the potential for developing nuclear weaponry. "It's vital that the Iranians hear the world speak with one voice that they shouldn't have a nuclear weapon," Bush said at a news conference with German Chancellor Gerhard Schroeder. "We absolutely agree that Iran must say no to any kind of nuclear weapon," Schroeder said. This sounded like coordinated diplomacy.

The importance of a carrot and stick attitude toward Iran was also highlighted during Bush’s meetings in Mainz. Yesterday, I saw the following headline on Expatica: “Bush won't compromise on Iran nuclear issue.”

The article continued: "Our policy is to prevent them from having the capacity to develop - enrich - uranium to the point where they are able to make a nuclear weapon," Bush told reporters at a news conference in the White House Rose Garden. He said the US recently agreed to allow Iran to apply for membership in the World Trade Organization "to facilitate the EU-3 discussions with Iran".

Given the fact the official US policy prior to the Mainz visit had been one of only sticks; no carrots, why does President Bush continue to get no credit for this compromise? He has acquiesced regarding the carrot that the EU3 had unilaterally offered Iran in 2004, but he will continue to be painted with a certain brush. Can we stop with the Bush-bashing long enough to acknowledge that he has given the trio exactly what they had indicated was absolutely necessary for their final diplomatic resolution (access to the WTO)?

Of course, we look forward to the successful (and peaceful) resolution of this issue.

Where Does Europe Go Now?

Is the notion of a “United States of Europe” a fool’s dream? As I have said before, the majority of the parliaments of Europe are run by elitists who try to be populists. The French National Assembly and the German Bundestag do not really represent their respective populations. Of course, this is somewhat true in the US as well, but it doesn’t seem to rise to the same level here.

As reported on Deutsche Welle: "I am convinced that we need the constitution if we want a democratic, social-minded and strong Europe," Gerhard Schröder said recently. Perhaps, for whatever reason, the European population is not convinced. The leadership has definitely done a horrible job of explaining the rationale behind ratification. In some respects they treated their populace like they accused George Bush of treating them…unilaterally. Schröder said the ratification process must continue. "The crisis about the ratification of the European constitution cannot become a general crisis about Europe," he said. There was no sound alternative, he added. Was this explained prior to the votes?

Luxembourg Prime Minister Jean-Claude Juncker indicated that "Europe no longer makes people dream."

This could be a huge part of Europe’s current problem. Europeans seem to be in the same type of funk that we in the US were in during the 1970’s (ie, the malaise of low expectations). A bit of good ol’ fashioned American “can do” could be in order for Europe.

The EU summit in Brussels on June 16^th and 17^th will be very interesting indeed. We will see if the leadership is willing to “look in the mirror.”