Battle of the economists: the inside story of Germany's internal policy knifefight.

• Author: Engelen, Klaus C.

A ghost is haunting major actors in the heated economic policy debate in Germany these days on how to get more than five million unemployed back to work, how to get frightened German consumers to start shopping again, and how to get the German economy to grow faster. This is crucial not only for Germany but also for all of Europe. After all, Germany represents about one-third of eurozone GDE This country of 82 million needs much higher economic growth to finance its costly welfare system, cope with the long-lasting burden of German unity, and put its fiscal house in order.

Up in arms is the orthodox supply side-wedded economist establishment--at universities, economic research institutes, and even at the German Council of Economic Experts, the panel of five prominent economists who advise the government. Alarmed are the neo-conservative preachers for more reform and more belt-tightening who are dominating the airwaves, television screens, and print media.

They fear that the ghost of Karl Schiller--minister of economic affairs during 1966-72 whose Keynesian thinking was behind major innovations in economic policymaking--might come alive through Chancellor Gerhard Schroder's newly favored economic adviser. Schiller's Keynesian ghost has a name: Peter Bofinger, 50, economics professor at the University of Wurzburg, whom Schroder appointed to the Council of Economic Experts last year and also unsuccessfully tried to put at the helm of the Deutsche Bundesbank.

Who was Karl Schiller'? In terms of post-World War II German economic history, Schiller could be considered Number Two in the Hall of Fame of the country's economic ministers. Number One was, of course, the legendary Ludwig Erhard, the architect of Germany's post-war "economic miracle" (Wirtschaflswunder) and its special blend of "social market economy." Schiller, who taught economics at Hamburg University to such successful policymakers as former Chancellor Helmut Schmidt, became the first Social Democrat to run the economic ministry on the federal level. Under pressure from a slowing economy and inflation, Schiller argued for abandoning Erhard's laissez-faire orientation after he took office in a "Grand Coalition." Schiller was convinced that governments have both an obligation and the capacity to shape economic trends and to smooth out and counter the business cycle. Schiller's formula was "Globalsteuerung," or a global process by which government would not intervene in the details of the economy but would establish broad guidelines that would foster uninterrupted noninflationary growth. For this purpose he pushed for legislation that would give the federal government greater authority to guide economic policy. In 1967, the Bundestag passed the Law for Promoting Stability and Growth that was considered a "Magna Carta" of economic medium-term management of the economy.

This law (Stabilitaetsgesetz) postulated four optimistic "magic aims" of stability of prices, high employment rate, economic growth, and external economic balance. The Council of Economic Experts was established in order to improve the quality of economic advice to the government. This body is what one might call the Mount Olympus for Germany's established economists. While in the United States the president and his administration can choose their own Council of Economic Advisers, the German Council consists of five independent economists who are appointed by the German president, after being nominated by the government, for a five-year term with possibility of renewal.

THE BIG GUNS OF GERMANY'S REFORM LOBBY

When Chancellor Schroder, in March 2003, made a U-turn from his social and labor market spending promises in the 2002 federal elections and outlined to parliament a radical downsizing of the welfare state, known as Agenda 2010, he had big guns to give him cover against the trade unions and the left wing in his own Social Democratic Party.

Agenda 2010 aimed at four main areas: relaxing rules protecting workers from dismissal along with other labor market reforms; modernizing the social welfare state; decreasing bureaucracy for small businesses and allowing crafts to launch new business ventures; and providing new low-interest loans to local authorities.

Prior to Schroder's reform initiative, there had been numerous calls for reform. Dominated by supply-siders, the "five wise men" had been presenting the Berlin government, year alter year, with a long list of urgent reforms, very much corresponding to the advice coming from the six publicly funded economic institutes. Also, Germany's central bank, the Deutsche Bundesbank, joined the calls for tough reforms to prevent a long-term slide in Germany's prospects in a paper entitled "Ways out of the crisis."

Maybe even more effective were the scare-and-doomsday bestsellers, some by respected economists such as Hans-Werner Sinn, who heads the Munich Ifo Institute for Economic Research and also chairs the Verein fur Sozialpolitik (VS), Germany's quasi-equivalent of the American Economic Association. In his 2003 bestselling book 1st Deutschland noch zu retten? (Can Germany be saved?), he comes up with a drastic therapy for what he thinks is a hopelessly sick Germany:

* Lower wages by 10 percent to 15 percent, with less-qualified job seekers having to accept wage cuts of about one-third of their present level;

* Unify support payments for unemployed and welfare recipients at a level averaging about one-third below the then-prevailing welfare payments;

* Abolish employment protection laws against dismissal for both large and small enterprises;

* Terminate overall collective bargaining agreements, shifting collective bargaining autonomy into individual firms;

* Extend weekly working hours to at least 42 hours; and

* Cut taxes dramatically.

Also, German business weighed in with a new propaganda campaign aimed at discrediting those who speak out against cuts in welfare and unemployment support and against dismantling employment protection. While not direct, the obvious targets were Germany's trade unions. This way, the well-financed and well-connected new "think tank," the Initiative Neue Soziale Marktwirtschaft (INSM), lent a helping hand to Schoder's...