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Walker's World: The Black Germans

By MARTIN WALKER, UPI Chief International Correspondent

WASHINGTON, Jan. 12 (UPI) -- Any visitor to modern Germany is struck by the remarkable contrast between the clean, efficient and unmistakably prosperous surroundings and the utter gloom of the locals. It is a palpably rich country that feels itself to be poor.

Everybody says so. It probably started in 1999 when Ottmar Issing, the European Ventral Bank's chief economist, first used the damning phrase "sick man of Europe." Now the European Commission is threatening fines because Germany's budget deficit is cleaving great holes in Europe's Stability Pact.

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For the past seven years in a row, Germany has been at the bottom of Europe's growth league, and the German government's own forecast of 1.5 percent growth this year would continue this wretched record.

But nobody believes the government. Bundesbank President Ernst Welteke said last week he expects growth of no more than 0.3 percent-0.4 percent this year. The respected DIW economic institute, closely linked to the governing Social Democrats, forecast 0.6 percent growth at most. Unemployment rose again last week and the gloom is unrelieved.

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So why does the place look so good? Because the Germans have stopped being Germans. They are no longer the law-abiding and dutiful citizens of the economic miracle of the 1950s and 1960s. They are fast becoming just like the Greeks and Italians -- hitherto Europe's record holders in that interesting socio-economic phenomenon, the black economy.

Professor Friedrich Schneider of Austria's University of Linz has just brought out one of his regular reports on the shadow economy, the cash-only, off-the-books, no records and no taxes system way in which people tend to work and trade when taxes are forbiddingly high.

Last year, says Professor Schneider, the black economy was worth 16.5 percent of Germany's GDP -- or $400 billion. In Berlin, the black economy was 22 percent of the economy. More than three-quarters of all construction work in Berlin was on the black. The Germany economy grew last year by less than one percent. The black economy grew by over 6 percent.

Given that most of the money earned in the black economy (two-thirds of it, Schneider thinks) gets re-invested into the formal economy as people buy food and cars and gas and clothes, this may not be a bad thing. Indeed, Schneider concludes, it has now become "one of the most stable pillars of our economy." Not to mention about the only way to get a kitchen or bathroom installed in modern Berlin.

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Among its European partners, Germany still has some way to go to catch up to Greece (29 percent) or Italy (27.8 percent), and is far behind the world champion black economy, Nigeria, at 76 percent.

But compared with Switzerland (7.5 percent), the United States (8.8 percent) or even Britain (13 percent), Germany's economic prospects are black and getting blacker. The phenomenon is changing the moral character of the country. Five years ago, only 31 percent of Germans thought the black economy was acceptable; now 40 percent do. It becomes right to cheat the state, and become a free rider on the society you inhabit, if you think the state is behaving unfairly.

Schneider, examining the role of the black economy in 21 of the advanced countries in the OECD (Organization of Economic Cooperation and Development) and 22 countries that are in transition to capitalism, established the following rules of thumb, which broadly hold good across all economies. For every one-point increase in regulation (on a 5-point scale), the shadow economy grows by 10 percent. A one percent rise in personal income tax leads to a 1.4 percent growth in the shadow economy.

The four OECD countries whose shadow economies are greater than 20 percent of GDP all have official tax burdens (combining income, payroll and social insurance rates) higher than 70 percent. The countries with the smallest shadow economies (the U.S. and Switzerland) have the lowest tax rates. Germans are taxing and regulating themselves into trouble.

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This situation has got so bad that the government has decided to make it legal. Chancellor Gerhard Schroeder has introduced a new tax reform called Ich -- AG (it translates as Me -- Incorporated) that allows the unemployed to earn up to $26,000 a year tax-free, at least until they are back on their feet.

Schneider thinks that's fine as far as it goes, but warns that the unemployed and people on early retirement perform only about 16 percent of "shadow" work. The best solution, he says, is to let people already employed (and paying taxes) earn up to $500 a month extra on the side -- and keep all of it, without paying social payroll taxes.

After all, the problem is not that the Germans have stopped working. They have just stopped wanting to share so much of their earnings with the greedy government. And that explains why the place looks and feels so much more prosperous than its officials figures say it could possibly be.

{Walker's World -- an in-depth look at the people and events shaping global geopolitics -- is published every Sunday and Wednesday.)

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