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Germany keeps cool in a crisis

THE financial crisis has turned Europe topsy-turvy, with governments freezing pensions, unions voting away privileges, and a thick web of safety nets disappearing one strand

THE financial crisis has turned Europe topsy-turvy, with governments freezing pensions, unions voting away privileges, and a thick web of safety nets disappearing one strand at a time.

But as the role of the state is being re-examined, one country stands apart: Germany, where reforms a decade ago made the country less generous than some of its peers but also helped ease the blow when the rest of the world stopped snapping up BMWs and Bosch washing machines.

Now, as its neighbours are being forced to retrench, and the future of the euro looking uncertain, Germany's social services are running surpluses, helped by taxes that are among the highest in Europe.

Many Germans are peering across their borders and wondering why others cannot do the same, putting intense political pressure on Chancellor Angela Merkel not to appear too generous with bailouts.

Other countries point out that Germany's wealth depends at least in part on outsiders spending on German exports. Germany's growth has slowed, to near flat in the second quarter of this year, and Merkel's commitments to keep funding bailouts have come under attack in parliament and in the country's constitutional court. But economists say Germany's own social services are sustainable, protected by the surpluses.

The crisis has forced other European countries to curtail their old ambitions. Already, France has increased the cost of medical treatment and pushed back the retirement age. Britain tripled university tuition fees. Spain's socialists took the distinctly unsocialist approach of restricting union bargaining rights. Greece has been forced to take biting austerity measures.

"Southern Europe is talking about cutting the generosity of their welfare systems," said Andreas Knabe, a labour economist at the Free University, in Berlin. "The German discussion is centring around entirely different things."

A decade ago, that was not the case, as Germany faced stagnant growth, forecasts of rising joblessness and the spiralling cost of unemployment benefits. The country was lagging behind many of its neighbours.

Then the chancellor, Gerhard Schroeder, staked his political legacy on a painful series of changes that slashed benefits for people who were unemployed for more than a year, aiming to push them back into jobs.

Other reforms privatised portions of the pension system, cutting guaranteed benefits. More recently, the retirement age was pushed to 67, from 65.

Unions made sacrifices, too. Wages stayed largely flat for the past decade even as industry profits and government tax receipts rose, making Germany one of the West's most competitive exporters. This was helped along by the euro zone, which made German products cheaper abroad than they were under the Deutschmark.

Other aspects of Germany's welfare state remained deluxe. Germans receive parental leave of 14 months at two-thirds salary, generous vacation time and publicly sponsored health insurance. And the tradeoff for flat wages has been a better chance at staying employed. If companies struggle, they can appeal for government funds to subsidise salaries.

Schroeder's reforms were deeply unpopular, and Merkel kicked him out of office in the next election.

But the economy has come back, even though growth has slowed in the first part of this year and turmoil has shaken the euro zone.

Unemployment dropped to 6.1 per cent in July.

Many workers are unhappy with the new jobs, saying that they don't pay enough. But many economists argue that the diversified job market has helped bolster Germany's economy as a whole.

That improvement can be measured on balance sheets, as numbers have turned from red to black. In the first quarter of 2011, the latest for which figures are available, the government collected more money for its health insurance programs and unemployment funds than it paid out.

The system's toughest test came during the global financial crisis of 2008 and 2009, when demand for the country's high-quality exports flatlined. The upheaval threatened to stretch safety nets to the limit.

Instead, unemployment kept dropping. That was in part the result of Schroeder's changes, but also because employers resorted to the government funds to subsidise their workers' salaries, avoiding layoffs.

The beneficiaries were workers such as Frank Pistoll, 51, who installs engines in luxury cars at a Daimler plant on the outskirts of Berlin.

During the crisis, there was not enough work for him for weeks at a time. Before Schroeder's changes, if he had he been laid off he would have received more than half his old salary indefinitely enough for many people his age to live on without needing to find another job. Because of Schroeder's cuts, when the recession hit, the benefits would have lasted about a year.

Instead, the government started subsidising his wages, easing pressure on Daimler and allowing Pistoll to keep his job.

All the benefits come with a price: tax bills that are the second-highest in Europe, and a nagging sense of economic insecurity, because of the flat pay and the new low-wage jobs, amid the outwardly robust economy.

Average workers send almost 40? of every euro they earn to the taxman, according to OECD figures nearly double that in the US, and well above France and Britain.

Unlike in the US, a broad range of politicians support robust government services and the taxes to pay for them. Voters generally back the high tax bills, too, with 70 per cent preferring to avoid new public debt instead of cutting taxes, according to a recent poll by the ARD broadcast network.

But as Germans look around them, many see a continent struggling to pay for the commitments its politicians have made even as Germans themselves pay higher taxes for services that are at times stingier.

Intense domestic opposition to bailouts has led Merkel to drag her feet in committing her country's money to bail out Greece, Ireland and Portugal, though she has yielded thus far, making her deeply unpopular in polls.

Nor do the objections come solely from disparate tax bills. A decade of flat wages has made many Germans feel they were forced to scale back while some countries that might now need bailouts did better.

Germany's domestic market is sluggish, the reflection of a society that saves out of a sense of insecurity, necessity and habit and that, paradoxically, makes the country deeply dependent on the consumption of others to keep their factories humming.

That means that many German voters feel the pinch right alongside the rest of Europe and don't want their money to be spent on bailouts elsewhere when they themselves feel vulnerable.

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