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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.

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