Wednesday, December 22, 2010

What is Germany doing that we aren't?

Germany has recovered from the recession faster than any other country. Here is why.

The days when Tony Blair was lecturing various EU countries on the importance of adopting the Anglo-Saxon model of beefed-up finance are now long gone.

When the biggest global recession in decades kicked in, Germany was able to weather the storm and recover much quicker and better than Britain, the US, or any other major Western economy.

Some of the reasons may be too complex for the scope of a blog post. Yet it's interesting that, while successive UK governments spent the last three decades actively pursuing overreliance on bullshit economy, Germany did not fall for short-termist solutions.

For one thing, not giving up on its manufacturing is certainly reaping the harvest now - look at how its booming export sales are proving the country's biggest asset as the Germans are getting out of recession faster than anyone else.

And so a number of legitimate questions arise. Why is it that after registering a slump of -4.7% last year, Germany is now forecast to end 2010 with a GDP growth of 3.6%, its fastest pace since reunification, while Britain is still finding its feet?

And why is it that while unemployment is still rising or stagnating in the US, Britain or other EU countries, the figures are going down fast and steady in Germany?

During the bubble years, Blair and Brown could at least boast that the UK's jobless figures were regularly lower than the rest of Europe. And it was true. Between 2000 and 2007, unemployment in Britain was never any higher than 5.5% (see this) while, in the same period, the German figures were regularly double that rate - between 8 and 10 per cent (see this).

Now look at the last two years. UK unemployment has overtaken Germany's at a hair-raising pace. While the jobless rate in Britain is now tickling 8 per cent, in Germany it decreased to 7.3 per cent at the start of 2010 and then further lowered to 6.7% in October (see this) - again, its best figures since reunification.

So what are the Germans doing that we're not, to the extent that many analysts are now openly talking of a "German Miracle"?

The answer lies in a policy that the German government adopted at the start of the crisis. It's called kurzarbeit and it literally means "short work". While other countries spent unprecedented sums on bailing out banks or dubious stimulus programmes, Chancellor Angela Merkel’s government (at the time a coalition of centre-right CDU and centre-left SDP) took a unique gamble by spending huge sums bailing out its work force.

And that's because, under kurzarbeit, employers hit by the downturn are encouraged to keep their workers part-time rather than make them redundant. The Federal Employment Agency (Bundesagentur für Arbeit) will cover up to 67% of lost wages and will also take care of national insurance and other contribution. The idea is that:

a) mass redundancies often mean a permanent loss of skilled work and specialised trade, especially in the industrial sector. By keeping workers active through a combination of part-time and training, the economy benefits the moment trade picks up - which is exactly what happened as Germany boomed in 2010;

b) the focus on employment and wages spared the country a vicious circle of mass unemployment leading to a drop in both tax revenue and consumer confidence - in turn leading to vast numbers of people defaulting on their mortgages and loans. In other words, as the money reaches consumers directly, it flows back into the market straightaway.

This may look expensive at first (£5.1bn a year), but it saved Germany a fortune in both welfare costs and bailing out banks.

Compare what Germany spent on their bail-out: 1.4% to 2.2% of gross domestic product (between €34bn and €52bn). In Britain it was a staggering 19.8%, almost a fifth of its GDP - and that's before the official cost was actually discovered to stand at an even higher £850bn.

Of course, the experiment is not without its critics. From the left, it's often said that Germany's recovery has taken place at the expense of the rising numbers of low-wage workers and unprecedented wage restraint. From the right, the objection that kurzabeit would simply lead to "a backlog of job cuts", to quote what the president of the German Bundesbank said last year.

And yet, time is showing that Germany's route to recovery is the correct one. According to the Organisation for Economic Co-operation and Development (OECD), the kurzabeit scheme saved nearly 500,000 jobs in 2009 alone and two months ago the German Upper House Bundesrat decided to extend it until March 2012.

More recents news report that Germany's industrial sector is currently in need of 34,000 engineers and 23,000 factory workers.

Indeed, a German success story.


Jackart said...

1) Manufacturing is more cyclical than services.

Of course the main difference is that Germany didn't have idiot brown running deficits during the boom from 2000, so they don't have to endure a massive fiscal tightening.

But you lot think deficits are "investment" or "stimulus" (depending on the state of play) and won't see that it's usually fiscal lunacy. Germany isn't at risk of a Bond-strike. The UK was (until the Tories changed the fiscal direction of travel).

Long term, German unemployment is higher BECAUSE of all those social model, job protection policies you're lauding. Not saying it's entirely bad, and lots of companies did similar voluntarily in the UK (JCB springs to mind) but lefties think unemployment IS a price worht paying for job security.

Welsh Agenda said...

In Wales we've had a similar initiative to Kurzarbeit, called ProAct. Essentially employers were given funding to train employees rather than make them redundent.

Apparently over 100,000 jobs have been retained in this way.

Maybe Engand could try something similar?

Nick said...

You have to wonder about how many of these numbers are really true. There are so many factors involved @Welsh; how can they know 100,000 jobs have been retained?

Visit our German American forum!

Welsh Agenda said...

@Nick yes of course any statistic produced by a politician (or journalist for that matter) needs to be treated with caution; and come to think of it 100,000 is a very round number.

However I'm inclined to believe that there is at least some truth in it as the the ProAct grant funding was made, I believe against specific named employees. I also agree that the reasoning behind it - that it is better help employers keep people in work in the sort term for the loner term benefit of society - is sound.

Stan Moss said...

Of course the main difference is that Germany didn't have idiot brown running deficits during the boom from 2000, so they don't have to endure a massive fiscal tightening.

And they also never had idiot Thatcher who, by 1983, turned Britain, once known as the "workshop of the world", into a net importer of goods for the first time ever courtesy of her hammering of heavy industry especially in Tyneside, Yorkshire, Merseyside, South Wales, the West of Scotland and the West Midlands.

For years, we've been running a huge, growing, trade deficit which is not permanently sustainable. How can you not think it was/is madness to let such a small island's productive resources be abandoned? Where's your patriotism when you need it? Let us hope this is the last dribble of Thatchrism down the leg of British politics.

BTW Germany is also running a deficit, Tory boy, and they also are adopting an austerity programme, though nowhere near as mental as what George Osborne's inflicting upon us all. The Germans are practical people. They saw what mental cuts did to Ireland and they're steering well clear of that.

Johnny T said...

"According to the Organisation for Economic Co-operation and Development (OECD), the kurzabeit scheme saved nearly 500,000 jobs in 2009 alone".

They save 500,000 jobs, we axe them. That is conservative German governments vs British ones in a nutshell.

thepatriot said...

Taking economic lessons from the Welsh AND the Germans?
I don't think so.
Two world wars and one Neil Kinnock should have taught your avaerage loonie leftie to keep away from German or Welsh #models#.

claude said...

Keep leaving braindead comments, patriot. It's the best possible publicity for the obnoxiously narrow-minded, ignorant, far-right mindset like the one nature chose to bestow upon you.