Yesterday marked the 10th anniversary of the launch of the most far-reaching economic reform package any major Europe an country has undertaken in recent decades.
Germany 's Agenda 2010 reforms, implemented by the then Social Democrat-led coalition, sought to shift incentives so that work was a preferable option to welfare for as many citizens as possible.
Agenda 2010 worked spectacularly well, as the chart shows. Now nearly three out of four Germans of working age is in employment. That is not only the highest among the large euro zone economies, but Germany is the only large economy in which the employment rate has risen since the middle of the last decade.
Nor has this been achieved by dismantling the welfare state, as Agenda 2010’s dwindling band of critics claim. On the contrary, Germany still has one of the highest levels of social spending in the world – just under one-fifth of GDP and barely changed on a decade ago.
By reforming the labour market and the welfare state, Germany has created both a stronger economy and a more effective and more sustainable welfare system.
Contrast the performance of the euro zone's biggest creditor economy with that of its biggest debtor, Italy.
Since the turn of the century, Italy has been one of the slowest growing economies in the world. Public debt as a percentage of GDP is now above 130 per cent (120 per cent usually considered a threshold above which the risk of default rises quickly).
If Italy has performed very poorly by most measures, it did make some progress before the crisis. Labour market reform, though not radical, did boost the employment rate in the years up to 2008, as the chart shows. But this was from a very low level and the proportion of adults at work remained well below to the rest of developed world. Since then, weak demand has undone much of the supply-side gains.
Other than very high public spending on pensions, there is little by way of a welfare state in Italy. Whereas Germans in some ways have the best of both economic and welfare worlds, Italians are in the opposite position.
Given the performance of the two economies and their respective reform histories over the past decade, it is not at all surprising that economists of most hues urge that the former adopt much of the latter’s Agenda 2010 reform model.
But that is now very unlikely. Such was the low level of support for pro-change parties in Italy’s election two weeks ago, it is very difficult to see the implementation of reforms that would give that country any chance of a return to decent growth rates.
The extraordinary performance of the Five Star movement amounts to one of the biggest shifts – if not the biggest – in the domestic politics of a euro zone member since the crisis started. Although not of the same sort of ideological extremes as some hard left and hard right parties, a pillar of the movement’s manifesto was withdrawal from the euro zone.
If Italy tried to recreate the lira under current conditions, capital flight would bring down its banking system, its sovereign and ultimately its economy. That one in four Italians voted for a movement advocating withdrawal says a great deal about how many Italians have come to see Europe.
In Germany, it is widely believed that Italians (and others in southern Europe) are not prepared to make the same reform efforts that they have made. This is undermining the (limited) feeling of solidarity that exists in Europe.
Confirmation recently that a new anti-euro party is to be formed in Germany is the latest and most significant manifestation of this. Heretofore, the absence of any party in parliament opposing the bailing out of the periphery gave the German government the freedom of manoeuvre to address the crisis. If the party wins significant support in September’s federal election, the entire dynamic will change.
A Germany with less rather than more solidarity and an Italy that wants less rather than more reform will all but guarantee the end of the euro.
