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Korea should learn lessons from Germany falling into trap of welfare and low growth

Korea should learn lessons from Germany falling into trap of welfare and low growth

Posted September. 07, 2023 08:26,   

Updated September. 07, 2023 08:26


Germany, Europe's largest economy and the world's fourth largest, is in big trouble. It is the only major industrialized nation on track for negative growth this year, and people who feel they are caught in a ‘welfare trap’ and don't need to work are fast growing in number. These problems are unlikely to improve anytime soon, leading to speculation that Germany is becoming the ‘sick man of Europe’ again.

The German economy grew -0.1 percent in the first quarter and 0 percent in the second quarter of this year, following -0.4 percent growth in the fourth quarter of last year. The International Monetary Fund recently lowered its growth target for Germany to -0.3 percent for the year. The downgrade comes as IMF raised its growth forecasts for other major developed economies. The IMF and other international organizations expect Germany to be the only country in the Group of Seven (G7) to post negative growth this year. Germany has been Europe's engine of growth for decades, so the recent decline is shocking at best.

The German economy's stagnation is mainly due to its overreliance on certain countries and industries. For the seventh year, Germany has been struck by a contraction in the Chinese economy, its largest trading partner. The country's reliance on cheap Russian energy and its nuclear phase-out policy led to an energy crisis in the wake of the war in Ukraine. The country's export-oriented manufacturing sector, especially automobiles, electronics, and machinery, has failed to develop competitiveness in high-tech industries such as information technology, and a rapidly aging population is eating away at its growth potential. The structural limitations of the German economy are further accelerating its stagnation.

In addition, a recent local poll showed that 52 percent of Germans believe that occupational work is not worth doing. The reasoning is that welfare payments such as unemployment insurance pay and child benefits allow people to maintain a similar standard of living as minimum-wage workers. The German coalition government, led by the left-leaning Social Democratic Party, has expanded welfare benefits every year, making people less motivated to work. Germany’s child subsidies have risen by up to 14 percent this year, and unemployment benefits are set to increase by 12 percent this year and next.

Germany's crisis has many implications for South Korea. South Korea's dependence on China and the manufacturing sector is far greater than Germany's, and its population is aging at the fastest rate in the world. Critics have pointed out that unemployment benefits that are higher than the actual minimum wage are spurring an increase in unemployment. We should learn lessons from Germany and proactively reform the nation’s industrial structure and diversify our export structure. We also need to break out of the ‘welfare trap‘ where the welfare system does not help recipients become independent but instead keeps them complacent with welfare money.