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Don't forget Germany

by Colman Thu Oct 18th, 2007 at 11:38:03 AM EST

Those of you who have been here a while will remember that when ET started up we wrote a fair bit about the "need for reforms" in Germany and the lies being told about German unemployment. Soon afterwards Merkel was elected and the media assumed that her reforming crusade had sorted out all the problems with the German economy so stopped talking about it. Strange that.

Anyway, now that there is a movement to undo some of the reforms in the labour market in Germany the issue has been picked up by the media again, with employers unions warning that the recent up turn in Germany's fortunes will be undone as well.

Eurozone watch has done two stories that question the link between those reforms and the economic growth.

Against this argument, a look at the German stock price developments relative to those in France over the past 10 years is quite illustrative (figure 3 below): At a 10-year-horizon, stock prices increased almost exactly as much in Germany as they did in France. During this time, Germany introduced the Agenda 2010 reforms which supposedly have improved the profit outlook and the supply side of the economy significantly. France, on the other hand, over the same period did very little to please supply-side economists: The time span actually covers the time of the Jospin government in which the 35-hour-work-week was introduced which increased labour costs and which has repeatedly criticised of hurting competitiveness and growth.
What matters of course for competitiveness, however, is the nominal wage increase relative to productivity as measured by unit labor costs. Figure 4 shows the relative nominal unit labor cost index of several countries relative to the Euro area average (1998 = 100), the calculations are explained in a paper by Dullien and Fritsche (2006). Again, it is impressive to see how Germany steadily improved its competiveness over 10 years in a row whereas other countries in the Southern cone of the Euro area show a steady decline over the same time span. But there is no evidence whatsoever that this trend accelerated after March 2003 when the Agenda 2010 was introduced (or after 2005 when it came into effect).
The reforms might have helped company profits, but they don't seem to have helped anything else: even long-term unemployment has been barely deneted.

Remember this next time some politician starts pointing at the German reforms as a model.
by Colman (colman at eurotrib.com) on Thu Oct 18th, 2007 at 11:38:51 AM EST
Don't bother me with your evidence! I'm an Austrian Economist, I laugh in the face of evidence.
</demonic possession>
by Metatone (metatone [a|t] gmail (dot) com) on Thu Oct 18th, 2007 at 12:13:53 PM EST
[ Parent ]
The reforms created about half a million low-wage jobs if most statistics are to be believed, but all in all there's not much they did to cause the economic upturn. It's mostly based on exports, anyway - rising productivity was the main factor.

The current discussions about some details of unemployment insurance are just political manoeuvring (fights for leadership in the SPD).

"If you know your enemies and know yourself, you will not be imperiled in a hundred battles." Sun Tzu

by Turambar (sersguenda at hotmail com) on Thu Oct 18th, 2007 at 02:21:00 PM EST
Mostly filled by short-term unemployed people, not long-term unemployed.
by Colman (colman at eurotrib.com) on Thu Oct 18th, 2007 at 02:25:37 PM EST
[ Parent ]
Here's a related voxEU piece from a couple of months ago.

Bottom line? It's the works councils, stupid:

Wendy Carlin and David Soskice: German recovery - it's the supply-side but not government labour market and welfare state reforms

Over the past decade or so, key changes have taken place in the export-oriented labour system. These have occurred outside the remit of government policy and have resulted from cooperation between company managers and their employees, through the medium of works councils. A major restructuring in organisation, training and in employment conditions has been negotiated. The result has been reflected in the strong performance of German companies in international markets based on improved price and non-price competitiveness.

The profitability of German firms has improved and this is reflected in the national accounts where the net profit share in both manufacturing and non-manufacturing business has staged a very impressive recovery. The deep disruption to the private sector of the German economy caused by unification has been overcome. The net profit share in manufacturing is now back to levels recorded in the early 1970s.

The real impact of policy "reforms" has been to further weaken consumption demand already weakened because of wage restraint:

. . . it is probable that the adoption by the German government of generic labour market reforms to increase the cost of unemployment has had the unintended consequence of raising precautionary savings . . . A second effect has occurred . . . wage restraint . . . reinforced the weakness of consumption by keeping real income growth low.
by TGeraghty on Thu Oct 18th, 2007 at 11:44:39 PM EST
What is this? Are we all Keynesians again?

We have met the enemy, and it is us — Pogo
by Carrie (migeru at eurotrib dot com) on Mon Oct 22nd, 2007 at 03:42:21 AM EST
[ Parent ]

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