Why Germany is weathering the European meltdown: Entitlement cuts a decade ago

Many Germans are peering across their borders and wondering why others can’t do the same, putting intense political pressure on Chancellor Angela Merkel not to appear too generous with bailouts. Other countries point out that Germany’s wealth depends at least in part on outsiders spending for German exports…

A decade ago, that wasn’t the case, as Germany faced stagnant growth, forecasts of rising joblessness and the spiraling cost of unemployment benefits that paid many workers more than half of their old salary indefinitely. The country was lagging behind many of its neighbors.

Then-Chancellor Gerhard Schroeder staked his political legacy on a painful series of reforms that slashed benefits for people who were unemployed for more than a year, aiming to push them back into jobs. Other reforms privatized portions of the pension system, cutting guaranteed benefits. More recently, the retirement age was pushed to 67, from 65.

Unions made sacrifices, too: Wages stayed largely flat for the past decade even as industry profits and government tax receipts rose, making Germany one of the West’s most competitive exporters. This was helped along by the euro zone, which made German products cheaper abroad than they were under the Deutschmark.