‘Germany isn’tworking’

‘ Europe has a problem – and its name is Germany,’ according to The Economist of January 19, 2002, in a leader titled ‘Germany isn't working’. Why? In the decade up to 2000, German economic growth was below OECD average, and in 2001, as the world economy slowed down, German growth slowed to just over half a percent per year, the lowest rate in the EU. By 2002, Germany hardly grew, and growth forecasts were gloomy. Unemployment had risen past the politically important level of 4 million, business as well as consumer confidence was at record lows, and the popular economic outlook was generally pessimistic. Germany had turned from the engine of the European economy into the laggard. What explains this dismal situation?

The usual answer, found in many newspapers and advisory commission reports, claims that the causes of the poor German performance lie in high wages and social security costs, complex taxes and tight labour market regulations. The excuse of reunification costs and shocks no longer has much credibility, according to The Economist.Given this diagnosis,most popular analyses suggest the obvious responses: the labour market has to be made more flexible, and the tax and welfare systems have to be reformed! The most prominent voice advising such reforms is perhaps the OECD in itsmost recent Economic Survey on Germany (2002j, pp.5, 13). And company bosses threaten tomove activities abroad if tax reform and labour market liberalisation will not take place very soon (Financial Times, December 16, 2002, pp.1, 3). The ‘proof’ that these reformswork is usually made by reference to better performing economies that have reformed their labour markets. Did not the US Federal Reserve Bank Board chairman Alan Greenspan advise the samewhen he said ‘that the greater easewithwhich employees can be laid off in the us has counter-intuitively created a greater incentive to hire and thus reduced unemployment in the US to levels unimaginable in all but a few countries in Europe’ (Wall Street Journal Europe, August 29, 2000)?

No question, Germany is not performing well in terms of economic growth and employment. In this sense it is indeed, and particularly was until 2000/01, a striking contrast to the ‘model economies’ discussed elsewhere in this volume.