How to get growth German style. Is it ‘consensus Thatcher-light’?

Matthias Schäfer, Berlin, Mar. 20, 2012
Editor: Konrad-Adenauer-Stiftung e.V.

Matthias Schäfer – Head of Team, Financial Policy and Labour Market Policy at the German think tank ‘Konrad Adenauer Stiftung’ – about why Germany is well placed to grow, even as the Western economy struggles.

Improving growth prospects in the post-crisis environment is a difficult task. First of all, higher growth requires macroeconomic stability and better public governance. Currently there is a lack of both. We are still in a nervous economic surrounding; neither Europe nor the US can confidently predict a sustainable economical upswing. There is no clear agreement on good international governance: results of G20 summits lack of commitment, European councils show little progress; national governments are in turmoil and criticized by public or even dropped by voters (e.g. Portugal or Spain) or by their own democratic legislator (e.g. Italy). Mistrust rules between politicians and marketers. These are the current determining force battering against all attempts to promote growth. But don’t be depressed. Individual nations can still do a lot to create economic growth.

Lots can be achieved domestically

The lion’s share of reform to promote growth still has to be done on home soil. Germany – ten years ago labelled the “sick man of Europe” – shows some insights of how to get back on track. Structural changes in the last decade focused on a wide range of topics. Labour market and welfare state systems were at the root of the reforms. In short, the reforms reduced unemployment benefits and made it harder for people to access benefits, thus pushing people to work. This was not easy as these reforms finished decades of deep common consensus about how the labour market was supposed to work. Germany shifted the balance of unemployment benefits from financing the lifestyles of the unemployed to concentrating on encouraging – or even forcing – people to work. The cost of the reform was high, not only for the Social Democratic government at that time but also for many people. But this long decade of wage moderation and wage restraints allowed German firms to cope with high labour costs. It was of course a hard lesson for employees who had to face – in real terms – decreasing wages in the last decade, with the lowest increase in Europe. Today we can see that these reforms have paid off and are the main reason for Germany’s labour market miracle. Keep in mind that German Mittelstand (SMEs) increased its productivity because they were given the freedom to corporately restructured as they saw necessary. This growth helped to strengthened the overall competitiveness of German companies in the global economy. Even smaller reforms like reducing bureaucracy burdens or corporate tax encouraged investment and promoted growth.

Balanced budget by 2016

Public institutions and the government also faced considerable changes. The pension reform will increase retirement age from 65 to 67 years in 2029, the new debt brake will structurally prevent Parliament and Government from spending more than the state earns from 2016 – a strong signal to the financial markets that Germany will maintain sound public finance. This culture of stability and long-term planning has been promoted to the corporate sector, who are expected to embrace it.

Both companies and workers adjust to global pressures

This is how Germany has given itself the opportunity to overcome the negative impact of the debt crisis faster then its neighbours. The highly competitive German corporate sector was ideally prepared to profit from a fast recovery in emerging markets. Social partnership between employers and employees helped to create tailor-made solutions in order to enable salary adjustments that maintained jobs, despite decreasing demands. This partnership and open dialogue has stabilized expectations of companies and workers. Another matter of interest is the fact that there has been a shift in the contribution to German’s economic growth from domestic demand.

Short-term pain for long-term gain

What lessons can be learned? The German example is the best example Europe has for promoting growth. Some other nations are already learning from the German experience. If you look at the Netherlands, Finland, Latvia or Poland you will see a mixture of wage moderation, structural reforms of markets and welfare systems, often accompanied by fiscal consolidation or at least budgetary discipline. In each of these cases you can observe improvement in competitiveness and productivity, and a way out of the economic crisis. These type of measures may be painful in the short term, but the whole country benefits in the long term.

Times have changed: In 2004, Gabor Steingart, a journalist, published a book called “Germany – Downfall of a superstar”. Nowadays, Bert Rürup, former member of the German Council of economic experts and journalist Dirk Heilmann predict in their book “Fat years” a growth rate of annual 1.5 to 2 %. Hopefully the hard but positive lessons Germany has learnt can help others.

Special thanks to Platform10.