Sebastian Dullien has a very interesting Policy Brief on the “German Model”, that is worth reading. Analyzing the Schroeder reforms of 2003-2005, it shows that it fundamentally boiled down to encouraging part-time contracts, but it did not touch the core of German labour market regulation:
Note, however, what the Schröder reforms did not do. They did not touch the German system of collective wage bargaining. They did not change the rules on working time. They did not make hiring and firing fundamentally easier. They also did not introduce the famous working-time accounts and the compensation for short working hours, which helped Germany through the crisis of 2008–9.
Thus, Dullien concludes, the standard Berlin View narrative, i.e. the success of the German Economy is due to fiscal consolidation and structural reforms in particular in labour markets, needs to be reassessed to say the very least. But there is more than this.
The standard metric of German success, its current account surplus (that resisted even during the crisis), is due to wage restraints and to weak domestic demand much more than to increased productivity. Dullien shows that Germany productivity growth in the past decade was only slightly better than the EU average, and was outperformed by countries like France Portugal or Ireland. A similar picture emerges looking at all the indicators of viable long run growth: Investment (public and private), R&D expenditure (public and private), Education (public and private). These indicators were actually made worse by the reforms of 2003-2005, that exacerbated the dualism of labour markets and helped create a serious problem of working poors, that will eventually worsen the dynamism of the German economy.
Dullien’s conclusion is unambiguous. Wage restraint and austerity only worked because applied in one country. The deflationary effects of domestic demand compression, and the potentially pernicious long-term effects of investment reduction, could be offset by exports. Clear and extremely convincing.
The way I see it, Dullien’s analysis can be complemented by a couple of remarks. The first is that the current account surplus should not be seen as a mark of success. Rather, it was a precondition for it. Without excess spending in other economies (most notably peripheral eurozone countries), the excess savings of Germany would have resulted in a slump. Germany embarked, the facto, in a beggar-thy-neighbour policy that only succeeded because the other eurozone countries did not retaliate. This is why I pointed, a number of times already, that the German model cannot be exported. And it is a very strange model indeed, one that would crumble if generalized…
The second remark concerns an observation that is marginal in Dullien’s argument (but shouldn’t, in my opinion). He argues that labour market reforms had nothing to do with another major factor of Germany’s success, namely its industrial specialization in high value added sectors (machinery, tools) that benefited of robust demand coming from emerging economies. I would argue that this is the major mark of German success: an institutional system (firms, government, unions) that, as a whole, has designed and implemented a successful industrial policy capable of anticipating and taking advantage of future trends in the global economy. The very same industrial policy that Europe as a whole refuses to put in place, or even to discuss; and that Treaties forbid individual countries to pursue, because it would hamper the free development of market forces. Its peculiar institutions allowed Germany, probably unintentionally, to circumvent the rules. For this not to remain an exception, it would be about time that Europe joined the other major world economies in using industrial policy as a tool to boost growth and unemployment.