Germany's Not-So-Wunderbar Economy

Throughout the euro crisis, Germany has been the area’s growth engine and enforcer of fiscal rectitude. Now economists and policymakers are warning that Germany may be reverting to some old bad habits. Jörg Asmussen, a European Central Bank board member nominated by Chancellor Angela Merkel, has even predicted that Germany may return to its status as the “sick man of Europe” should its symptoms go unaddressed.

Without the willingness of Merkel and most German voters to support more than €300 billion ($393 billion) in bailouts and guarantees, Europe’s debt crisis might have led to the breakup of the euro currency bloc. Yet the drive to rescue Europe has distracted Merkel from the situation at home, where labor costs are rising at their fastest pace in a decade. Those costs are erasing most of the economic progress made under her predecessor Gerhard Schröder, who cut taxes, unemployment benefits, and health-care services in what was seen as the biggest change to Germany’s welfare system since World War II. The reforms cost Schröder his job.