German Economic Striving at the Expense of Workers and Neighbors Will Backfire

The export-obsessed Germans have created an economic race-to-the-bottom in which no one can win. But there's a better way.

Unemployment in Germany is now at a 20 year low and the country’s economy seems to be impervious to the strains afflicting its neighbors in the economic periphery- notably, Greece, Portugal, Italy and Spain. So shouldn’t everyone else be copying Germany’s model? In a recent speech in Berlin, Angel Gurría, the secretary general of the Organization for Economic Co-operation and Development (OECD), a group of 34 developed countries, gave Germany a big thumbs up, saying that the country’s “growth model has been so successful in navigating through the stormy waters of the crisis.”

But hold on a minute. Germany’s model is badly flawed. And because it impoverishes workers, the model will ultimately be a drag on the European economy. Contrary to conventional wisdom, building economic growth by squeezing workers is not a recipe for success. Here’s why.

Who Needs a Mini Job?

The Germans have always been obsessed with export competitiveness. In the period before the euro, they would devalue the Deutschmark so that they could increase the sales of their products to their neighbors. Once the Germans lost control of the exchange rate by signing up to the Economic and Monetary Union (EMU), they couldn’t perform this trick anymore. They had to manipulate other “cost” variables in order to sell goods cheaply. So starting in 2002, they focused on wage suppression and cutting into the social safety net for workers through something called the Hartz package of “welfare reforms,” named after Peter Hartz, a key executive from German car manufacturer Volkswagen.

Unlike the American Henry Ford, who created good, well-paying jobs because he knew that having a secure middle class was essential to having a market for his cars, Peter Hartz views the relationship between wages and the economy very differently. In his view, squeezing workers is the way to keep a country “competitive.”

The Hartz reforms have been extremely far reaching in terms of the labor market policy that had been stable for several decades. Bill Mitchell and Ricardo Welters noted that while the reforms appeared to be successful in early 2003, with lots of jobs created, there was a downside: “From the bottom of the cycle, in mid-2003, employment grew much less quickly than in previous upturns. And much of the rise took the form of ‘mini jobs’ – part-time posts paying no more than €400 a month, regardless of hours.”

The “reforms” actually decreased regular employment. Workers got stuck with so-called “mini/midi” jobs – a new form of low wage part-time employment. Such jobs were hailed as “flexible” and “efficient” by their champions, while detractors noted that they were part-time jobs characterized by heightened insecurity, lower wages, and poorer working conditions.

Floyd Norris of the NY Times captures this trend well in a recent piece on “Germany and the rest of Europe”:

“Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have ‘fixed-term contracts,’ which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a ‘two-class society,’ with most older workers in a protected group and most younger ones outside of it.”

In the wake of Germany's ill-conceived reforms, the private saving caches that were accumulated over years of hard work for many will have been reduced significantly as wages stagnate and millions of citizens (the youth of today) will be without work experience and adequate skills.

Over the last 30 years, neoliberals have typically framed discussions of western economic policy as arguments against the power of labor unions and their embrace of “inflexible” working practices. Policies based on such arguments tend to transfer profits from workers to employers, which in turn results in a massive rise in corporate profitability, but a corresponding impoverishment of the middle class and rising income inequality. This systematic redistribution of income – aided and abetted by governments in a number of ways through privatization, outsourcing, pernicious welfare-to-work, and industrial relations legislation -- has been one of the building blocks of the global economic crisis. And Germany has been at the forefront of this via the Hartz reforms.

Germany could move away from the obsession with exports and instead promote growth based on domestic investment in things like education, technology, infrastructure, and the creation of decent jobs. But the Maastricht Treaty, one of the founding treaties of the European Union, places explicit limits on the ability of member governments to spend. Sadly, this is a highly self-defeating strategy, because during recessions, the private sector cuts spending and tries to increase savings, moving the government balance further into deficit territory as automatic payments like unemployment benefits kick in that are meant to stabilize the economy. The so-called “Stability and Growth Pact” limits government deficits to 3% of GDP, and overall public debt levels are restricted to 60% of GDP. This has led to increased unemployment and high private debt throughout the eurozone.

A Race to the Bottom

Germany has responded to these restrictions by championing wage cuts, demolishing working conditions, and abandoning job security. The theory is that given the structure of the euro, the only way that these nations can become export competitive is to squeeze workers, however painful. But here’s the rub: labor productivity may be rising strongly. But workers have less money in their pockets, and so they can’t afford to buy anything. That’s not a formula for long-term economic growth.

The German economic model leads to a “race to the bottom” as far as wages go. Germany, as the exporting nation in the EU, constantly has to drive down domestic wages to ensure that the exports remain internationally competitive. Everybody works harder, but people have less money to spend. Meanwhile, Germany chastises its neighbors for their “profligacy” but relies on their “living beyond their means” to produce a trade surplus that allows its government to run smaller budget deficits. For now, people in Greece and Italy buy the German exports because they are cheap, but they certainly can’t embrace Germany’s economic model because it’s ultimately self-defeating. If the exporting nation continues to drive wages down, then products become increasingly expensive. And there’s another problem. In order to retain higher profit margins, German manufacturers will almost certainly migrate to lower cost manufacturing centers if unions fail to stop “deregulation” of the kind which simply lowers their take home pay further. In this scenario unemployment numbers in Germany will go up.

Instead of hurting its neighbors and hurting itself in the process, the Germans might look back in history and see that there are better ways of doing business.

If Americans had adopted a similar “beggar thy neighbor” philosophy after emerging victorious from World War II, the German economy could not have recovered. But the victorious Americans did not preach austerity, despite the fact that Germany had clearly lived well beyond its real resource limits during the War. Even after the devastation that Germany caused as a result of its misguided territorial ambitions and heinous ethnic policies, the Marshall Plan, the large-scale American program to aid Europe, sought to build the German economy rather than to destroy it. The Germans were faced with a massive destruction of public and private infrastructure and knew that a return to very fast economic growth was necessary to minimize the damage and contain it in historical time. The upshot of the Marshall Plan was a period of unparalleled economic growth in Europe. That’s the ideal that should guide economic policy makers going forward.


Marshall Auerback is a market analyst and commentator.
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