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Speech by Federal President Horst Köhler at the Employers' Forum: "Business and Society" held in Berlin

Federal President Horst Köhler at the Employers' Forum Berlin, 15 March 2005 Photo: bpa © Photo: bpa

"The order of freedom"


Some 5.216 million people are officially unemployed in Germany. You will therefore not expect me to give a celebratory speech. So let me get down to business:

Germanyhas been untrue to itself. We have long since abandoned the recipe for success which brought the Federal Republic of Germany confidence and prosperity, stability and respect after the war. Even before anyone started talking about globalization, Volkswagen Beetles were a regular feature on the roads all over the world - and they just kept on running. At that time, an order prevailed in Germany which encouraged achievement and engendered social progress.

This order is in decline, having been gradually undermined by ever new interventions, even if they were well-meant. For many decades now, the Federal and Land Governments, and not least Brussels, have thought up an increasing number of new restrictions and regulations. Business and social associations have played their part. Unions and management have concluded agreements at the expense of others and citizens have been happy time and again to accept promises of favours and gifts. That is why the unemployment rate has been continually rising over the last few decades. That is why high taxes make work expensive and yet cannot protect our social system from impending collapse. That is why mass unemployment has not been caused by economic factors but is largely a structural problem. All of this is also reflected in the level of our debts and future encumbrances. The current debt stock (1.4 trillion euro) and accrued rights to social insurance (5.7 trillion euro) total 7.1 trillion euro. That is equivalent to 330 per cent of our GDP. Do we truly realize what burden this legacy places on our children and grandchildren?

Fifty years ago, Ludwig Erhard said that society could only achieve its real goals on the basis of a healthy economy. This is truer than ever today. And the world is not standing still, while democracy and the market economy are increasingly gaining ground. We are pleased about that. Naturally, this has given rise to new global competition for work and prosperity. At the same time, we are inexorably confronted with the consequences of the fall in the birth rate. Together, these two factors are putting our entire economic and social order to the test - whether we like it or not. We are faced with the huge task of reshaping our policies.


The task ahead is onerous. The Agenda 2010 reforms were a courageous start and they will have a positive impact. However, we must be honest with people and tell them that we are not finished yet. We need a modern welfare state which is compatible with sustainable public finances. We need an efficient tax system which rewards achievement but, at the same time, gives unto the state what belongs unto the state. We need a fresh wind in the spheres of education, research and family which lends our society cohesion and enables it to believe in the future. And we need to modernize our federal structure in order to bolster our country's ability to reform.

All of this will take time - many legislative terms. We cannot afford tactical breaks in the reform process because of upcoming elections, or even a zigzag course. The veracity and constancy, consistency and reliability of politicians are the key to citizens' trust. I welcome the fact that the Government and Opposition are going to sit down together this week. Action for action's sake is of no use. What we need are further sustainable measures aimed at tackling unemployment. I hope that the framework for a comprehensive renewal of the economy and society will also be discussed. Both the Government and the Opposition have a patriotic duty to do so.


I am firmly convinced that we possess the necessary energy, creativity and solidarity and I am sure that most people want to have control over their own fate. This desire is good. It needs freedom in order to unfold. And in unfolding it also acquires a binding effect. It needs an order which both fosters and rewards this responsibility for itself and others. We should be guided by this order of freedom. This requires a stronger focus on a regulatory framework.

The order of freedom means that citizens charge the state with laying down the rules of the game. But it is the citizens who play the game. The rules are: private ownership and contractual liberty, competition and open markets, free pricing and a stable currency, safeguards against the major risks in life for everyone and personal responsibility on the part of every single individual for everything they do. The modern welfare state protects against hardship; however, it does not pretend to guarantee individuals that it can maintain their living standards.

Citizens must be able to rely on these rules. They must know what is in store for them. Without reliability there can be no trust. Without trust, there can be no upswing.


During the last few months, I have received many letters from desperate citizens describing their search for a job. These people want to work. Given the state of the labour market, we need to put job creation at the top of the political agenda in Germany. Whatever serves to create and safeguard competitive jobs has to be done. Whatever stands in the way of this must be avoided. Anything that serves other purposes, no matter how desirable, is of secondary importance. I hope that all those shouldering political responsibility will adopt such an outlook. In the process, we must realize that we cannot overcome mass unemployment quickly. However, if we truly give priority to job creation then the unemployment rate could fall again soon. And on a long-term basis.

During the last few years, the unions have moderated their wage demands, thus making a valuable contribution towards enhancing competitiveness. This course, which deserves recognition, must be continued. However, we have made no real progress towards solving the core problem, namely excessive non-wage costs. They have made jobs in Germany so expensive that many people have hardly any chance at all of finding work. Academic studies have shown that a fall in social security contributions has a lasting impact on the number of new jobs created. A complete decoupling of social security costs from wages would be the most effective solution.

Non-wage costs are not only so high due to the steep social security contributions. More than half of all non-wage costs are a result of collective bargaining agreements. For too long, such agreements have been concluded at the expense of others - at the expense of the unemployed and the taxpayers. And employers' associations always played their part in this.

High non-wage costs represent a particularly insurmountable hurdle for job seekers with few qualifications. I believe that we have not yet made sufficient use of the instrument of wage subsidies. I know that the hesitant steps taken so far have not yet produced the desired results. However, we should not be discouraged by this but continue looking for solutions in this difficult area of the labour market. Proposals on this - ranging from enabling social welfare to the Magdeburg Alternative - have been put forward. I would like to encourage politicians specializing in the labour market to try out these models.

It has now been recognized that flexibility is the most important factor when it comes to safeguarding jobs. Much has been done in this respect. For example, the "breathing factories" in the car industry have shown how the number of hours worked can be adapted to demand with intelligent working hour models. This and other company employment pacts ensure flexibility. It is therefore important to facilitate their conclusion - whether through collectively agreed or legislative provisions. This will safeguard and create jobs and attract investors.

And another thing: in Germany only 40 per cent of those over 55 still have a job while in Switzerland, in contrast, the figure is almost 70 per cent. This cannot be put down to people, for the Germans and Swiss are not really that different. We cannot afford to do without the know-how and experience of older employees. Consequently, there is only one sensible course of action: all labour market regulations, whether collectively agreed or legislative provisions, must be vetted to ensure that they are conducive to job creation.


In order to boost growth and employment in the long term, we also need comprehensive tax reforms. The German tax system is complicated and confusing. In the current World Economic Forum's country ranking, it is in 104thplace among the 104 countries reviewed when it comes to efficiency. We are not competitive in this field. Our tax system scares people away - especially investors. It must undergo a radical overhaul with a view to lowering taxes and broadening the tax base. There is sufficient evidence that this will even improve the state's revenue situation. And, naturally, the state needs a solid revenue base.

In particular, our state has the highest corporate taxes in Europe. At the same time, these corporate taxes yield the lowest revenue in Europe in relation to GDP. This is due to the fact that our legislators allow large and resourceful companies to pay low taxes while small and medium-sized companies bear the full burden. In addition to this, the latter are saddled with the administrative cost of tax assessment, especially as our tax law is constantly being amended. I therefore believe we should start by reforming corporate taxes before undertaking a comprehensive revamp of the tax system.

However, we also need political courage and perseverance in reducing subsidies. Many studies show that there is considerable leeway here. Recently, the Friedrich Ebert Foundation's managers' circle estimated that there the potential savings could be in the order of some four per cent of GDP. A major reform of our tax and social systems should not founder because of financing.


Wherever I go, businessmen tell me that bureaucracy is costing countless jobs. Someone has calculated that a medium-sized company works approximately 230 hours per year just for the authorities and statistics. That means that it loses a whole month every year in business terms.

The Federal Government, Länder and the European Union should finally take to heart this quote from Montesquieu, "Useless laws weaken the necessary laws".

Perhaps it would be helpful if independent experts not involved in politics were to assess every bill before it is debated in parliament to see whether it fosters or hinders job creation. At any rate, every effort should be undertaken to effectively reduce bureaucracy.

The fight against bureaucracy is not only directed at the authorities. Often the opponent is amongst the ranks of those who would actually benefit from less bureaucracy. Those who know the procedures say that the influence of the trade and industry associations on legislation is one of the main reasons for complicated and incomprehensible laws. Everyone should therefore first put his own house in order.


Lower labour costs, a more flexible labour market, a sensible tax system and much less bureaucracy: all of this will help us further improve our competitiveness. But particularly as we do not want to, and indeed cannot, lower wage levels in Germany to those in Poland or China, a job creation strategy for Germany requires a second component, and that is innovation. Education, science and research are the key to this.

I called it a country of ideas - others call it the knowledge society. Only by constantly widening our knowledge and using it to develop new products, will we be able to maintain our position in a globalized world. To the extent that our products are more expensive than others, we also have to be better than others. We need teachers who are keen to impart something new to their pupils - and pupils who want to be inspired. We need parents who raise their children to be eager to learn and who also understand if there is a hole in the carpet after experiments. We need instructors who can instil their students with the joy of truly mastering a trade. This is how sound knowledge and critical thinking, inquisitiveness and a joy in experimentation originate.

In its current form, our education system can no longer provide the basis for this. Almost nine per cent of all pupils - that amounts to some 85,000 each year - do not gain any qualifications. Businesses complain that a growing number of applicants are unable to calculate or write properly and our schools and universities are mediocre by international standards. How long will it be before we take action?

And yet there is increasing agreement on what has to be changed in the education sector: early learning, more individual attention, comparable and internationally recognized education standards, more competition and autonomy for individual schools and universities, systematic encouragement and support on a broad basis and at the top, life-long learning. The continuing dispute between the Federal Government and the Länder about competence in issues relating to education, science and research is therefore all the more incomprehensible. And I simply cannot understand how the reform of the federal structures can founder because of this. Our country needs swift action, not bickering, in the fields of education, science and research.


Germany's goal is to ensure that the state and business spend a total of three per cent of GNP on research and development as of 2010 at the latest. I have heard that it is far from certain that we will reach this target. That is alarming for we actually need much more than three per cent, and we need it as quickly as possible. Instead, we are falling behind in the research and development sector of all places. Public expenditure is dwindling and the German economy is stagnating. In 1991, we were in third place in the international league table. Today we are in eighth place. That should induce politicians to urgently review their priorities. They must also reassess the framework for innovation, particularly in small and medium-sized companies, from venture capital to licensing conditions, to ensure that everything possible is done to create jobs.

However, businesses must do a lot more here, too. We all know companies which are leaders in their branches, in terms of both sales and technology, due to tireless innovation. However, there are too few. You cannot reach the top if you are too slow to grasp opportunities. Successful companies seek competition and want to be among the best at international level, too. They know that innovations are the elixir of life, indeed of survival.

But in Germany there are still too few good ideas reaching the market. Only one in ten patents is actually used. That is not merely a result of unfavourable basic conditions. Evidently some ideas also fizzle out in companies. If that is to change, we must be enthusiastic about innovation and this enthusiasm must grip the entire company, from the boss to the shop floor. Thomas Alva Edison said a hundred years ago that his goal was to produce a minor invention every ten days and a major one every six months.


I am not saying this simply to criticize businessmen. I am saying it because I am concerned about the main task of companies, which is to be successful on the market and earn profits. That has to be said again and again. In Germany it is occasionally considered morally suspect to make a profit. That is wrong. Any respectable businessman who earns a profit has convinced others of his performance and helped them. And only those who yield profits can ensure the survival of their companies through investments, continue employing their staff and create new jobs.

Successful businessmen are particularly aware of the importance of an open working atmosphere and good relations with their workforce. Those who respect the private lives of their employees and create a family-friendly atmosphere, foster commitment and loyalty, and that too will pay off.

Some companies earn handsome profits but do not invest because they have so little confidence in Germany as a business location. I would like to say to them: you should not have such a poor opinion of Germany. And as for its weaknesses: Germany is working on them.


So let us trust in our country and let us all work on the great reform project. We have what it takes to rebuild the order of freedom. We will succeed if everyone plays their part. I sense everywhere that people are prepared to pull in the same direction.

John F. Kennedy often visited Cape Canaveral. It is said that he once spoke to a worker who was sweeping a hall. "What's your job here?" he asked him. The man replied, "Well Mr President, I'm helping to put a man on the moon". Some may laugh at that but I am impressed by the force of this reply.