Beating the Crisis
Germany and Europe Must Defy Political Trends
A commentary by Christoph Schwennicke
Former German Chancellor Helmut Kohl was in Berlin recently. Speaking in a firm voice, he expressed clear, albeit contentious thoughts. The chancellor from the last century admonished his party, the center-right Christian Democratic Union (CDU), on the 20th anniversary of its merger with its East German counterpart, to energetically defy political trends and avoid pursuing the latest fashions. Kohl said that the party could succeed in this effort, but only if it had the will to do so.To illustrate his point, he named the somewhat unfortunate example of compulsory military service, but the subtext of his appeal went beyond the military issue. His message was that many aspects of public life, including conscription, government infrastructure and the social security systems, should not be treated like jeans, tight one summer and baggy the next. Be careful, Kohl advised his fellow conservatives, when you are told that an idea is old-fashioned and no longer contemporary. Question the motives of those who would attempt to turn entire systems on their heads.
Kohl knows what he is talking about. Former Chancellor Gerhard Schröder, who succeeded Kohl, based his entire campaign on this method. You were fine, Helmut, but now you're no longer the right guy, the Schröder campaign seemed to say -- too old-school. Kohl stood for the calcification of Germany. Schröder easily won the 1998 election.
Like Kohl, the idea of secure government pensions -- defended most notably by Norbert Blüm and Rudolf Dressler, was likewise ridiculed as being too old-fashioned. The criticism was justified, but Germans forgot to take a critical view of the alternative. No one questioned the magic formulas of Schröder disciples Hans Martin Bury and others, with their momentous talk of "capital cover" and privatization. It was très chic, it promised to offer a solution, and anyone who questioned it was decidedly démodé.
Capital cover has since proven to be one of the most misleading terms of the last 20 years -- it is often the case that absolutely nothing is being covered at all. Germans were led to believe that all of the problems of the social security systems could be solved by eliminating the government's stranglehold on them. In return, policy holders would have to allow financial service providers to invest their money in the capital market.
The term "capital cover" was misleading in three ways. First, it covered up the fact that contributors must contribute fresh money of their own. Second, there was the risk inherent in the capital market. Finally, there was the question of who consistently benefits from this new system.
The risks have since caught up with the new system and, in the course of the financial crisis, brought down its apologists along with the economy. Hans Martin Bury, after serving as Schröder's right-hand man at the Chancellery, worked as an investment banker at Lehman Brothers, the firm whose bankruptcy triggered the financial crisis. Private health insurance companies face precisely the same problems -- obsolescence and financial difficulties -- as their competitors in the statutory health insurance system because, on the one hand, their hand-picked, young, healthy and dynamic clientele has become older and more susceptible to illness and, on the other hand, the return on their reserves is stagnating.
Consuming Its Own Children
The capital cover system is consuming its own children, which anyone who has been caught up in the current trend of offsetting a private loan with the supposed panacea of life insurance can appreciate. Nowadays, financial advisors are embarrassed when asked about their past recommendations.
The government cannot safeguard your pensions; that's something only private financial service providers can do, Gerhard Schröder insinuated, and too few citizens sufficiently questioned this assertion. Although it wasn't the intention, the outcome was that financial entrepreneurs like Schröder's old friend, AWD founder Carsten Maschmeyer, profited handsomely from the policy while the problems of the social security system remained unsolved. Politicians and the public had succumbed to the promises of a financial industry that benefited from these innovations. A critical look at the annual statements of the new fangled pensions, known as Riester pensions in Germany, and the pension insurance system reveals that the government pension system is clearly a sad affair with a deplorable rate of return on investment. But the Riester pension also falls well short of promises. Its introduction 10 years ago constituted an admission of the complete failure of the government system. A decade later, the capital-covered Riester pension itself has also proven to be a failure.
Common sense has since taken over. Many people are dissolving their Riester contracts prematurely, preferring to take a loss than to continue filling up a barrel that could also spring a leak. The Riester pension has proven to be just as precarious as government pensions. Nevertheless, when it comes to insurance policies designed to cover old age care, capital cover is once again being considered as an option. Insurance agents are already salivating at the prospect.
The capital cover trend went hand-in-hand with the privatization trend. "Privatize it!" was the rallying cry of the reformers, who stigmatized the state as a money-gobbling Moloch and led us to believe that we would be better off allowing free market forces to do their magic. Municipalities and cities succumbed to this siren song when it came time to fund public projects like streetcars and waste incineration plants. In the end, there was only one winner in this dodgy scenario known as "cross-border leasing," and it wasn't the municipalities.Financial desperation prompted cities like Berlin to pursue the seemingly sexy idea of privatizing many municipal services, including the water supply. It had less to do with the free market economy than with the idea of a planned economy, because it became known that Berlin's agreement with the private purchaser included a clause that allowed it to raise water prices and guaranteed it high returns.
The fact that the German rail company Deutsche Bahn is currently capitulating in the face of winter is a result of the delusional notion of its former chairman that he could privatize the government-run operation and become the head of one of the top companies listed on the German stock exchange, the DAX. In pursuing this goal, Hartmut Mehdorn cut operating costs to such an extent as to render it partially inoperable. Anyone who still believes that a private railway is more effective than a government-owned one should take a train in England and then in Switzerland. The railroad, local public transportation and the water supply are better left in government hands. In this area, a government monopoly is always the lesser evil.
It was the in thing, and there were many who made a pile of money putting this particular bug into politicians' ears. Now none of this can be reversed, but a new year is the perfect time to make resolutions. One resolution would be to learn a lesson from this experience and not to succumb so readily to the nonsense of political fashions, which are all too often controlled by business interests. These days, Germany is not proving to be the fallen superstar, as it was described in bestsellers. And the new superpower, China, does not derive its strength from an unleashed neoliberalism, but from a rigorous, post-socialist neo-statism, which justifiably runs up against democratic constraints in Europe.
- Part 1: Germany and Europe Must Defy Political Trends
- Part 2: More Europe Is the Lesson