The Economy in Germany

So far Germany has been better able to master the crisis than have other countries in Europe. This raises the question whether Germany might not serve as a model for others. But can the German experience really be applied so simply to other countries – Italy, for example? Goethe.de spoke about this with Ulrike Stein of the Institute for Macroeconomics and Economic Research (IMK) at the Hans Böckler Foundation and Professor Christian Dreger, Head of the Department of Marcoeconomics at the German Institute for Economic Research (DIW) in Berlin.

Comparing the two economies is problematic because there are very great differences in the underlying conditions, says Christian Dreger: “Italy’s economy has shown only modest growth rates for more than 15 years. Industrial production has stagnated and is declining in many areas. In addition, Italy, with an export ratio of less than 30 percent, has benefited less than Germany from developments in the world economy”. Italy is currently in a recession; the unemployment rate is just under 10 percent and the debt corresponds to 123 percent of the gross domestic product (in Germany: 82 percent).

Germany, on the other hand, entered the crisis in mid-2008, when the world economy was hit by the financial crisis from a phase of economic boom. Businesses kept on their skilled workers through short-time work programs. In addition, accumulated work time credits were redeemed and the potential flexibility better exploited. This strategy has ultimately proved to be the right one. Thanks to the rapid recovery of the world economy, Germany was quickly able to offset the production losses.

Crisis buffer: short-time work

Ulrike Stein also points to short-time work as a crisis buffer: “Both Italians and Germans have been using the instrument of short-time work for some time to keep on employees during phases of recessions”. But the system of short-time work functions differently in Italy. “Since Italian employees are less protected in the event of unemployment without income, short-time work during the crisis has been used as substitute unemployment insurance. At the beginning of the crisis many employees moved into ‘zero hours’ (subsidized temporary layoffs), that is, they actually became unemployed.” The result: when their short-time work money ran out, they surfaced in the unemployment statistics.

By comparison, in Germany in mid-2009 there were more than 1.5 million employees in short-time work, but most of them reduced their weekly working hours only up to 25 percent. Not even ten percent of all short-time workers work less than even half their normal hours. On average the reduction was about 30 percent.

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According to Christian Dreger, the cooperation in collective bargaining in Germany also cushioned the effects of the crisis. “This made possible lower wages and a flexible approach to collective agreements.” Thus unit labor costs could be kept low. Unit labor costs rose overall 6.2 percent per employee in the EU from 2005 to 2010, but only 3.6 percent in Germany. In Italy, on the other hand, cooperation in collective bargaining was much more difficult because of the fragmentation of the labor unions. Although there are traditionally three large umbrella organizations, each is further divided into branch unions. This tends to weaken their position at the bargaining table, especially since in most unions not the actively employed but pensioners are in the majority.

Social cohesion at risk

Ulrike Stein mentions another aspect. Given the incalculable extent of the recession, the German federal government refrained from relying on labor market policy instruments alone. In short order it laid on several stimulus programs, including the famous cash for clunkers premium, in order to offset the sharp decline in demand.

The Italian government, on the other hand, hardly supported the economy. The reason: the state has too much in debt. Nor was this incorrect – the debt level of over 120 percent of the GDP paralyzes the state’s scope of action and the economy as a whole: interest charges rise, investors stay away and the necessity of cuts triggers opposition that could lead to the fissuring of society. Tax increases, cuts in social spending, reduction of transfer payments – all this, says Dreger, is a necessary if painful process of adaptation for Italy. “It will be more difficult to maintain social cohesion than it has been in Germany, which already has several of these adjustments behind it.”

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Social inequality also widening in Germany

Dreger points out that, in some respects, Germany and Italy are more similar than many people suppose: both countries have had a declining birth rate in the past 20 years, the average age of the population is similarly high (44.9 in Germany, 43.5 in Italy), the age pyramid is upside down and, as Germany has its weaker eastern part, Italy has its weaker southern regions as a mortgage – “though”, he notes, qualifying this last statement, “the economic output per capita in eastern Germany is 70 percent of the western level, while that of the Italian south is often less than 50 percent of the northern level”.

That not everything in Germany that glitters in the statistics is gold has in the meantime got about Europe. Thus Piotr Buras noted in the Gazeta Wyborza (June 21, 2012) that economic inequality in Germany has increased faster than elsewhere in the industrialized world. Though many people who were unemployed benefited from the creation of new jobs, an unusually high number of the new positions included insecure, non-contractual, low-paid “junk jobs” (Buras). “Then there is the very high debt of many communities, which have been forced to make drastic cuts and have now shut public services, swimming pools, cultural and centers for social work.”

What follows from this? There are no models; the starting points are too different. Nevertheless, says Dreger, in view of globalization, and despite all the differences between north and south, the economic and political systems face similar challenges. “Whoever wants to compete on the world market needs more flexibility. The international division of labor will continue to differentiate itself, jobs for the less qualified will migrate to low-wage countries, the social systems will come under pressure. But only if there is investment can there be growth that will guarantee the financing of social systems. And in this Germany is currently clearly in a better position.”