A long-dead German finance minister,
Ludwig Erhard, a German statesman and economist, was largely responsible for the economic recovery of West Germany after World War Two. (Photo by © CORBIS/Corbis via Getty Images)
Corbis via Getty Images
A long-dead German finance minister, Ludwig Erhard, can show how Germany could make a miraculous recovery from its current dangerous malaise.
Germany is in an ominous funk, which is why a far-right political party, Alternative for Germany (AfD), is now the country’s second largest. It is anti-capitalist, anti-American, anti-NATO, anti-immigrant, pro-Putin and extremely nationalistic. Given the history of two world wars, this force’s taking power in Berlin is obviously a big worry.
Germany is a mess. It’s crippled itself with high energy costs by shuttering nuclear power plants, waging war against fossil fuels and going all-out for costly, unreliable windmills and solar panels. It deliberately made itself very dependent on imports of Russian natural gas.
The economy is largely dead in the water. Its once-vaunted manufacturing and engineering sectors are increasingly uncompetitive. Its once-impressive work ethic has withered. Its extensive, overly generous and expensive welfare system has become unaffordable. People are disgusted with massive, uncontrolled immigration.
Friedrich Merz, who became Chancellor earlier this year, is well aware that big changes are needed to get the country moving again economically, which is crucial to fend off these frightening political forces. Thanks to the desire to keep the powerful AfD out of the government, Merz’s conservative party was forced into a coalition with the brain-dead Social Democrats.
Merz pushed through a blowout spending program for badly needed infrastructure upgrades and—most welcome, given Putin’s imperial ambitions—a huge buildup of Germany’s military. Merz is navigating politically tricky welfare and pension changes. He’s also gone for some smallish, phased-in corporate tax cuts and cutting back Germany’s notorious administrative and regulatory red tape.
All well and good.
But to jump-start the economy, he needs to be bold on tax cuts. Experience has repeatedly demonstrated that big, properly implemented reductions in tax rates are a sure way to quickly fire-up commercial activity.
For audaciousness, Merz should take inspiration from the way Ludwig Erhard almost overnight launched what quickly became known as “the German miracle” from the ashes of World War II. After the war, the German economy was moribund, weighed down by sky-high taxes, smothering wartime controls and rationing and a worthless currency. Shortages of food and other essentials were a fact of life.
Untainted by any Nazi associations, Erhard became director of the economic council for the Allied zones of occupation. Against great skepticism, he pushed through a new currency, the Deutschmark, to replace the discredited old one. More radically, he abolished wartime rationing and controls. Worried, the chief U.S. officer warned Erhard that Allied experts felt this bold approach wouldn’t work. Erhard replied, “Don’t worry. My experts tell me the same thing.” Another officer said that Erhard would need Allied permission to make changes to the current system. Erhard replied, “You’re right. But I’m not changing the system. I’m getting rid of it.”
Erhard also instituted tax cuts, and when he became the chief financial officer of Germany’s elected government, he systematically reduced taxes for years after.
The Germany economy boomed as never before.
Today Germany’s tax burden is far too high, stifling the economy. The top personal income tax of 42% is quickly reached. The German corporate tax rate is one of Europe’s highest and should be reduced now, not years down the road, as Merz proposes. Payroll taxes for various social security programs come to a staggering 40%-42%, shared equally between employer and employee.
This is almost three times what we pay in the U.S. These rates should be slashed. The capital gains levy of 26.375% should be halved. The ensuing resounding prosperity would ultimately result in a surge in government revenue. Germany’s success would be imitated by other European countries.
The politics of dangerous discontent would recede.
Source: https://www.forbes.com/sites/steveforbes/2025/10/02/what-friedrich-merz-must-do-to-revive-germanys-economy/
