Germany Remodels

Many Germans are proud that Europe's largest economy also has some of the world's most generous benefits in welfare, unemployment, healthcare, and job protection.

And for decades, Germany could subsidize the weaker economies of other European Union members, helping to unify a continent and promote peace. It gave up its precious deutsche mark to adopt the euro and paid handsomely to bolster the old East Germany after reunification in 1991.

But this laudable largess, born of the German "economic miracle" of the 1960s and a desire to be a model for the rest of Europe, began to erode on Sunday.

Germany's ruling liberal party, the Social Democrats, voted overwhelmingly at a party congress to start rolling back the country's social-safety net, which Chancellor Gerhard Schröder said is "unfortunately too expensive."

"We need a change in mentality in this country," Mr. Schröder said. "People who think everything can stay as it is are deluding themselves. We need to change just to keep the wealth we have."

Like Britain under Margaret Thatcher in the 1980s, Germany could be on the verge of major conservative economic reform - under liberals, no less - that would change the course of Europe. Germany under Bismarck, after all, invented the welfare state. "The whole of Europe is waiting for us to implement these reforms," said Wolfgang Clement, minister of labor and economics.

Schröder's reforms, if passed by parliament this fall, would make it easier for many companies to fire workers, reduce unemployment benefits from 32 months to 12 months for most jobless workers, and trim medical coverage to put more of the cost on the worker. Jobless workers would get fewer opportunities to refuse to take jobs not to their liking.

And those are just a few of the steps needed to revive an economy that's been the weakest in Europe for seven years. Germany is on the verge of its second recession in two years. Unemployment remains stuck above 10 percent. One of the world's lowest birthrates will leave Germans with few workers to pay the pensions of an aging population. Germany now spends nearly two-thirds of its government budget paying for its welfare state and its debt.

Most of all, big companies are setting up plants and offices elsewhere, fleeing the high costs of employing German workers. (Nonwage labor costs are 42 percent of gross wages.) Schröder, whose popularity has fallen for not implementing economic reforms, says Germany must "modernize or we will be modernized by the unremitting forces of the market."

He could only get his party's support for these limited reforms by threatening to resign. Social Democrats know they need him to win. Most of the party's leaders are also members of Germany's powerful trade unions, which oppose reform. But as Minister Clement told the party: "If we don't do it, it will be done by others [opposition Christian Democrats] who do not share our values."

Josef Joffe, editor of the newspaper Die Zeit, believes Germany is "a blocked society, incapable of reform." But Sunday's vote may show that post-postwar Germany is just as capable of economic reform as it was after World War II - especially reform that instills more self-reliance and entrepreneurial spirit.