How Unequal Is Germany?

In Germany, the social market economy has always been regarded as a guarantor of growth, prosperity and social participation. However, public debate is increasingly raising doubts about the social market economy’s ability to reconcile economic growth with social participation.

To find out about the level of equality in Germany, we set up a debate and questioned the two leading economists in the country, Professor Marcel Fratzscher, President of the German Institute for Economic Research in Berlin, and Professor Clemens Fuest, Head of the ifo (Institute for Economic Research) in Munich.

Is prosperity for everyone or just a few?

Marcel Fratzscher paints a clear picture in his analysis of the social market economy: “The credo that the German economic and social system has led to growth and prosperity for many decades no longer exists in this form.” The social market economy is neither social, nor is it a functioning market economy. The high levels of inequality in terms of opportunities, income and wealth prevent fair competition and social advancement. The German promise of ‘prosperity for everyone’ has long since been a thing of the past. “It is no longer possible for many people to provide for themselves through the fruits of their own labor, and thereby bear the risks that life might bring.  In Germany, it is increasingly the case that the poor remain poor and the rich remain rich.”

According to Clemens Fuest, inequality is not the biggest concern in the Federal Republic. “Inequality is a much bigger problem in the USA, in the United Kingdom and in many other national economies. Nowadays, monopolies, economic policy measures and price interventions represent a greater threat to the social market economy – things that Ludwig Erhard always warned of.” The cap on rent prices and the minimum wage are examples of such negative developments. The Federal Republic has managed to cut unemployment by a considerable margin in recent years, thus reducing the high level of inequality that existed in the early 2000s. “15 years ago, Germany was still regarded as the sick man of Europe; nowadays, the country is seen as having the strongest national economy. If you take into account the fact that people are now employed, then the level of inequality can be said to have declined since 2005; if you don’t include unemployment numbers it remains constant.” There can therefore be no talk of an increase. Clemens Fuest is certain that inequality is most marked when it comes to unemployment. “Wage differentiation is one thing, but exclusion from the labor market is even worse as this goes hand in hand with a decline in future opportunities.”

Marcel Fratzscher does not believe that a reduction in unemployment alone is an indication of success. “The term ‘social’ doesn’t just mean creating jobs; it means creating good jobs.” Though many people have obtained employment, when you examine the development of employees’ real wages over the last 20 years, it becomes clear that today these wages have less purchasing power than they did 20 years ago. In view of the very good situation in the labor market and the halving of the unemployment rate, maintaining the level of equality as in 2005 cannot be regarded as a success. “In East Germany, 40 percent of households obtain half or more of their income through state transfer payments; dependence on the state has massively increased.” This goes to show that the principle of personal responsibility, which is so important in a social market economy, has been abandoned.

Reforms and investment are imperative

The two economists’ opinions might have differed considerably when assessing inequality, but they shared the view that central reforms and future investment have thus far failed to materialize in the Federal Republic. In particular they felt there was considerable potential for reform in the tax and transfer system, such as relieving the burden on the middle class, increasing taxation of capital and wealth, reforming the inheritance tax law and reducing the tax burden on labor.  According to Clemens Fuest, there are numerous measures in the German tax system which only benefit a small group. “The objective must be to create more fairness in the tax system and thus more competition,” added Marcel Fratzscher. Furthermore, they emphasized the necessity of investing more heavily in early years provision than had previously been the case, and of strengthening equality of opportunity: “One euro invested in early years education will generate a much greater return than one euro invested in the university sector” declared Marcel Fratzscher.

Interested in more expert analysis on the situation of inequality in Germany? Check back here or on our YouTube channel soon for additional interviews!