In Germany, once a symbol of prosperity and stability, economic stagnation and social discord have taken root. A stark wealth divide, with the top 10% controlling over half the wealth, fuels discontent. Amid economic uncertainty, fringe ideologies gain traction, evident in recent protests and political disarray. As polarisation intensifies, the nation grapples with challenges from infrastructure woes to fiscal missteps. Reforming the tax system and promoting wealth distribution are vital for Germany’s future, as a disillusioned populace flirts with radical politics, threatening the very cohesion it once prided itself on.
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Why Germany Is Rich But Germans Are Poor and Angry: Chris Bryant
By Chris Bryant
For much of its postwar history, Germany was a beacon of prosperity and political stability. Now its economy is stagnating, and social harmony has given way to acrimony and division.
Germany’s grossly unequal distribution of wealth is an underappreciated cause of this malaise: The top 10% of households have at least €725,000 ($793,000) of net assets and control more than half of the country’s wealth, while the bottom 40% of households have at most €44,000 of net assets, according to a Bundesbank survey in 2021.
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Together with a pervasive sense that Germany is coming unstuck — think creaking infrastructure, inflation and the loss of cheap Russian gas — economic precarity makes Germans susceptible to fringe arguments that their living standards are threatened and the government is out of touch. In the long term, Europe’s biggest economy must reform its labor-penalizing tax system and promote a broader distribution of capital.
Irate farmers have blocked roads nationwide in recent days, ostensibly to protest agricultural subsidy cuts. They have been joined by supporters of the far-right Alternative for Germany (AfD) who blame the country’s welcome of migrants for its fiscal and economic woes. Almost one-quarter of the population say they would vote AfD if an election were held today – and depressingly, I don’t rule out that figure increasing before next year’s national vote.
The federal government is in disarray, having been forced last month to find €17 billion of savings in this year’s budget following a constitutional court ruling that its attempt to repurpose unused pandemic funds for climate investments was illegal.
Reconciling the Free Democrats’ anti-borrowing philosophy with the Social Democrats’ commitment to welfare spending and the Greens’ determination to promote decarbonization has led to bickering and compromises that satisfy almost nobody.
Gallows bearing the traffic-light symbol of the three-party coalition have appeared at roadsides, and Germany’s economy minister, Robert Habeck, was blocked from leaving a ferry by an angry crowd.
Echoing the vituperation of Trump supporters and France’s yellow vests, and fanned by similar social media echo chambers and suspicion of mainstream media, this polarization is nevertheless shocking for a country that prides itself on cohesion and shared prosperity.
But the shared prosperity bit is partly a myth: Inequality is high by European standards and median net wealth of around €106,000 is well below the euro-area median of around €150,000.
Of course, there’s an argument that Germans don’t need a lot of money to live comfortably due to high-quality public services: Child daycare is free in some federal states, as is public university tuition. Lately, labor unions have won pay hikes, while savers have earned higher interest on bank deposits; farmers too have earned higher profits.
However, fewer than half of households own a home and hence haven’t benefited from soaring property prices — the median wealth of German tenant households is just €16,000, according to the Bundesbank.
Meanwhile, only around one in six Germans invest in the stock market. In 2019, German Chancellor Olaf Scholz, who was then finance minister, revealed he kept all his money in a low-yielding bank account. Although his admission may have won the sympathy of Germany’s cautious savers, it spoke volumes about the country’s self-defeating attitude toward investing.
Much of Germany’s wealth is held by private, family-owned small and medium-sized companies known as the Mittelstand. These are an engine of job creation, but their thrift underpins the current account surpluses Germany is often criticized for, contributing to inequality and suppressing domestic consumption, according to the International Monetary Fund.
For a long time Germany’s booming exports and budget surpluses deflected from these shortcomings, but the weaknesses of its economic model have now become apparent. Output contracted by 0.3% in 2023, according to an official estimate published on Monday, and the economy might expand by just 0.3% this year, say economists surveyed by Bloomberg.
An aging population is also straining Germany’s generous social insurance system. Unless reformed, the proportion of the government budget spent on pensions could rise to more than half by 2050, compared with around one-quarter today.
Finance Minister Christian Lindner’s plan to augment the pay-as-you-go pension system with a debt-funded German sovereign wealth fund invested in global equities isn’t sufficient to close the financing gap.
Germany’s increasingly fractious politics make me unoptimistic about the chances of further reform to reduce inequality and broaden asset ownership, but there’s no shortage of good ideas.
The Organization for Economic Cooperation and Development and leading German economists have long criticized the country’s tax system because the burden is skewed too much toward wages, while property and inheritance taxes are low.
There are sweeping inheritance tax exemptions for business owners, for example, on the grounds that jobs and investment might otherwise be endangered. These rules are far too cushy, and the upshot is taxes on large inheritances are often lower than a smaller bequest.
Broadening wealth need not mean taking it from the rich. Germans lack tax-efficient ways to invest in the stock market — there isn’t an equivalent of the UK’s individual savings accounts (ISAs) or US 401ks and Roth IRAs, for example.
I’m also in favor of a citizen’s inheritance — a cash distribution of, say, €20,000 to every young adult that could be reserved for specific expenses like acquiring property or paying for education. Not surprisingly, AfD politicians oppose the idea, because it might mean giving even more money to migrant children.
An irony of the AfD’s increasing support is that many of its low-income supporters would benefit little from its program, which includes opposing property, wealth and inheritance taxes. Helping more people share in the benefits of economic prosperity would go a long way toward neutering support for radical political parties and cooling the anger now boiling over in Germany.
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