Two cheers for the Rhineland model

Not so long ago, Germans and other Continental Europeans pointed to America's "working poor", as well as to the sorry state of public services in Britain, as defects that supposedly reflected the inevitable price Anglo-Saxon countries must pay for their ruthless form of capitalism. Europeans (Germans in particular), on the other hand, enjoyed the "Rhineland model": A market economy that harnesses economic success to the cause of social justice.

So when Chancellor Gerhard Schröder, early in his first term, signed the so-called Blair-Schröder paper, which pledged agreement with British Prime Minister Tony Blair on liberalising reforms, he made certain that it was published in London and played down in Berlin. Similarly, the European Union's Lisbon agenda of economic liberalisation was never really taken seriously in Germany, France, or most other countries on the Continent.

How things have changed in the last five years! Today, few people - if any - refer to the Rhineland model with such satisfaction.

As things stand now, the German economy lags behind most others in Europe, and almost all European economies trail Britain and the United States. Unemployment is high and growing, as German companies move production to low-wage countries in Eastern Europe or Asia. In Germany, "capitalism unmodified" has begun its reign. Profitable companies are closed if their returns fall below international standards. Managers' salaries - including bonuses for failed or departing directors - have reached new highs.

If all this leads people to conclude that social justice is being sacrificed to profits, cuts in public expenditure harden that conclusion even more. Social entitlements are being reduced, while individual contributions to cover the cost of health care, pensions, education, and basic welfare programmes rise - not just in the Rhineland and neighbouring länder, but in other countries that follow a similar model.

One reason is straightforward and increasingly widely understood. The old system of social justice, the welfare state, was based on assumptions which no longer hold true. Some may never have been viable. For example, the Rhineland model used many measures of social policy that had built-in growth trends that were bound to make them unaffordable. This is true for health care.

In addition, demographic changes reduced the number of contributors while increasing the demand for services. Unsurprisingly, high payroll taxes strained the capacity of working people and mounting non-wage labour costs eroded companies' international competitiveness. For a while, borrowing hid the extent of the problem; but today the extent of the burden that the accumulated debt that resulted from this borrowing is placing on future generations - a grave injustice in its own right - is clear.

Thus, the Rhineland model's once-robust institutions of social justice were bound to be squeezed. But the capitalism that formed the Rhineland model's other component also changed, and here it is not wrong to blame globalisation. Companies formed international links in order to remain competitive.

Many of these links were with British or American companies, which led to a profound change in business culture. The old notion that large companies are responsible for their employees' welfare from cradle to grave - providing not only wages and bonuses, but sports facilities, cheap holidays, and generous retirement benefits - fell into desuetude. Overseas owners were less than understanding of the German custom of paying a 13th monthly salary at Christmas.

Beyond business culture, there is the fact that manufacturing, until recently the major source of strength of the German and other European economies, has begun to emigrate in a big way. Soon not only our refrigerators and television sets, but even our cars and machine tools, will come largely from China. There is no obvious substitute for such industries at home.

Does this mean the end of the Rhineland model? In the first instance, it does mean that reforms are necessary. People have become weary of the word reform, because for most it means a reduction in entitlements and living standards. Still, constructing a welfare state fit for new economic conditions is a task that must be undertaken.

This will be a welfare state based on a new balance of solidarity and individual effort. It may mean that, after a decades-long economic miracle, people must accept a modest reduction in their standard of living.

The more difficult task will be to transform traditional economies into truly modern ones. No one has yet managed this process, not even the Anglo Saxons. A truly modern economy will be a service economy that combines high-productivity knowledge activities with indispensable personal service jobs.

Such economies need not follow the same blueprint. It is possible - indeed, likely - that modern service-based economies will look very different in the Rhineland, Southeast England, Lombardy, and the Île-de-France. Such diversity may include varying degrees of social justice, if people choose to pay more or less for that purpose.

So there is no reason for despair in the Rhineland - or for gloating by the enemies of its economic model. Even in an increasingly globalised economy, diversity will continue to be the hallmark.

Ralf Dahrendorf, author of numerous acclaimed books and a former European Commissioner from Germany, is a member of the British House of Lords, a former Rector of the London School of Economics, and a former Warden of St Antony's College, Oxford.

Copyright: Project Syndicate/Institute for Human Sciences, August 2004.