In a recent article in Foreign Affairs, Steven Rattner – former advisor to President Obama on the auto industry – explains the roots of Germany’s economic success. The degree of this success can hardly be underestimated. Germany has become the second-largest exporter after China, less than 3 million Germans are unemployed and as the US economy was shedding jobs in the period 2007-2011 (unemployment in the US rose from 4.6% in 2007 to 9% in 2011) unemployment in Germany fell from 8.5% to 7.1%. Back in the mid-1990s, in his celebrated book The State We’re In, British journalist, Will Hutton, was cautious in his support for the German ‘social market’ model. The model has not failed, he wrote, “the question is how far it can succeed in the new environment” (The State We’re In, Vintage, p268). Rattner’s message is that it has succeeded far beyond expectations. The US, he suggests, has much to learn from the high value export-oriented manufacturing that goes on in Germany.
It is interesting to see how Germany’s success came about. In the early 2000s, Germany was struggling. Still paying the bill for reunification, and suffering the consequences of a strong Euro, the economy was in recession at a time when others were thriving. Rattner describes the response of the Social Democrat-Green coalition government, led by Gerhard Schröder. Entitled Agenda 2010, Schröder pushed through an extensive reform program, involving some cuts in state welfare and in labour market regulation. The main element of the program, however, and one only a Social Democrat government could have managed to push through, was a deal with the trade unions on wages. The deal was simply that on condition that unions kept wages down, the government would guarantee jobs. Additionally, Germany introduced a ‘short-work scheme’: workers worked for less hours and the government made up some of the difference in lost income. In its philosophy, Agenda 2010 wasn’t so different from France’s 35-hour week law introduced in 1998 and 2000 by a French socialist government: the reduction in working time was accompanied in France by a two year freeze on wages and end of payment for overtime. Whilst the effect of the French policy remains the subject of extensive debate amongst economists and econometricians, in Germany the effect is clearer. Rattner notes that around 1.5 million Germans were enrolled in the ‘short-work’ scheme at its peak and according to the OECD, 500, 000 jobs were saved by the program during the recent economic downturn.
Two key points follow from this. Firstly, whilst German competiveness increased via Agenda 2010 reforms, boosting its export industry, the effect on domestic demand has been severe. In a December 2010 International Labour Organization report, it was found that real earnings in Germany dropped by 4.5% in the last decade. As Rattner notes, Germany’s great success has not translated into an improved standard of living for its population as a whole. Surely this should qualify our use of the term ‘success’, asking more specifically success for whom?
Secondly, what Rattner doesn’t say is that this has also resulted in a chronically low level of aggregate demand in Germany: with real wages falling, Germans are unsurprisingly choosing not to spend their money. This has generated problems across the whole Eurozone as Germany sells its exports to other Eurozone members but does not buy their imports. Strikingly, about 80% of Germany’s trade surplus comes from its trade with other members of the Eurozone. The Agenda 2010 reforms are thus a prime example of ‘beggar thy neighbour’ policies: German growth comes not from selling BMWs to the Chinese but from selling high end products to the rest of Europe. If other Eurozone countries, from Greece through to France and Spain, were to follow in Germany’s footsteps, brokering deals with unions to keep wages down and focusing on export markets, Germany would then find that its own European exports markets are drying up. There is no way out it seems from the fact that export-driven growth requires the flipside: an economy that sucks in imports. Germany’s European neighbours have played that role in recent years, at their own expense. Would the US, China and India take up the slack if other European countries follow Germany’s lead? EU policies at present seem to assume that the Eurozone’s problems will disappear if only other Eurozone economies look a bit more like Germany’s. Nothing could be further from the truth.