IZA Tower Talk - Report

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Bundesbank President: "It takes a whole pillbox to cure Germany’s home-made problems"
Axel Weber, President of the German Bundesbank, was the invited guest speaker at the IZA Tower Talk on November 24, 2005. In his speech on the opportunities and risks of globalization, he emphasized the urgent need for reforms of the German labor market. The former economics professor at the universities of Bonn and Cologne warned not to make the globalization phenomenon a “scapegoat for home-made problems”. Based on a number of economic facts, he concluded that Germany is clearly among the beneficiaries of international economic integration. Since the actual victims are much rather found in Africa, which has been largely excluded from the benefits of globalization, Weber called for a comprehensive removal of trade barriers for these countries.
For Germany, in contrast, globalization is like a vitamin treatment for the ailing welfare state and the labor market, Weber explained. ”We need a whole pillbox to cure these patients”, he said. While the right prescriptions are readily available, policymakers are still reluctant to administer the much-needed medicine. In order to solve the structural problems of the welfare state, health insurance and long-term care insurance should be disconnected from labor costs, collective bargaining regulations and layoff protection should become more flexible, and public subsidies should be shifted from declining to aspiring industries, particularly the service sector. The time for reforms is running out, Weber warned, as demographic change would severely aggravate the problems from 2010 on.
Hilmar Schneider, IZA Director of Labor Policy, agreed with Weber that it must be doubted whether the new federal government will have the strength to implement effective reforms against the expected public opposition. While the Grand Coalition offers an opportunity to overcome the political standstill, the diverging ideologies and interests of the involved parties could just as well stand in the way of a far-reaching reform strategy.