The comeback of Modell Deutschland? The New German Political Economy in the EU

Abstract

Since the early 1990s four institutional weaknesses have taken turns as the popular ‘whipping boy’ for Germany's economic ills: a backward-oriented, bank-dominated financial system; an insider-dominated corporate governance system; rigid labor markets and inflexible unions; and an overly expensive welfare system. This paper surveys a wide range of the reforms that have been undertaken to redress these weaknesses. While there is still a clear need for further labor market and especially welfare state reforms, Germany's institutional reforms to date represent successful adjustment to more global and competitive capital and product markets – one that preserves an economic model capable of combining relatively high social equality with long-term competitiveness. In this sense Germany has laid the foundations for a comeback and may still serve as a model for all of the European Union.

The author would like to thank Mitchell Smith and Sigurt Vitols for comments on earlier drafts, and Molly Ruhlman and Juliane Troicki for able research assistance.

Notes

1. For one comprehensive academic critique see Stephen J. Silvia, ‘Reinventing the German Economy’, AICGS Policy Report #8 (2003).

2. This section parallels the discussion in Richard Deeg, ‘Change from Within: German and Italian Finance in the 1990s’, in Wolfgang Streeck and Kathleen Thelen (eds.), Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford University Press, 2005).

3. Susanne Lütz, ‘The Revival of the Nation-State? Stock Exchange Regulation in an Era of Globalized Financial Markets’, Journal of European Public Policy 5/1 (1998), pp.153–68.

4. Ibid.

5. Richard Deeg and Susanne Lütz, ‘Internationalization and Financial Federalism - the United States and Germany at the Crossroads?’, Comparative Political Studies 33/3 (2000), pp.374–405.

6. For other reviews of finance and corporate governance reform see Nicholas Ziegler, ‘Corporate Governance and the Politics of Property Rights in Germany’, Politics and Society 28/2 (2000), pp.195–221; John Cioffi, ‘Restructuring “Germany, Inc.”: The Corporate Governance Debate and the Politics of Company Law Reform’, Law and Policy (December 2002); Gregory Jackson, ‘Corporate Governance in Germany and Japan: Liberalization Pressures and Responses during the 1990s’, in Wolfgang Streeck and Kozo Yamamura (eds.), The End of Diversity: Prospects for German and Japanese Capitalism (Ithaca: Cornell University Press, 2003); Sigurt Vitols, ‘Negotiated Shareholder Value: The German Variant of an Anglo-American Practice’, Competition and Change 8/4 (2004), pp.357–74.

7. Lütz, ‘The Revival of the Nation-State?’.

8. Ibid.

9. John Cioffi, ‘Expansive Retrenchment: The Regulatory Politics of Corporate Governance Reform and the Foundations of Finance Capitalism’, Paper presented at the German Studies Association, New Orleans, 18–21 September 2003.

10. The law places some limits on bank ownership of industrial capital and also allows German corporate managers to buy back their own shares, a technique commonly used in the US to boost share price. Closely tied to this are the newer regulations permitting firms to pay their managers with share options, again a widespread practice in the US but previously unknown in Germany. See Cioffi, ‘Expansive Retrenchment’ for more details.

11. Cioffi, ‘Expansive Retrenchment’.

12. Ibid.

13. Ibid.

14. Many large firms in other states, for example, are protected by ‘golden shares’ held by governments which enable them to block takeovers. Such shares do not exist in Germany.

15. Martin Höpner, ‘European Corporate Governance Reform and the German Party Paradox’ (Unpublished paper, 25 November 2002); Cioffi, ‘Expansive Retrenchment’.

16. The law also strengthened the power of supervisory boards vis-à-vis management (Höpner, ‘European Corporate Governance Reform and the German Party Paradox’).

17. Dieter Fockenbrock, ‘Corporate Governance auf dem Prüfstand’, Handelsblatt, 7 March 2005.

18. Stefanie Franzke, Stefanie Grohs and Christian Laux, ‘Initial Public Offerings and Venture Capital in Germany’, Working Paper No. 2003/26 (Center for Financial Studies, Johann Wolfgang Goethe University, 2003), p.2.

19. Ibid., p.11.

20. For an opposing argument on the future, see Vitols, ‘Negotiated Shareholder Value’.

21. Richard Deeg, Finance Capitalism Unveiled: Banks and the German Political Economy (Ann Arbor: University of Michigan Press, 1999).

22. By 2001, 16 German firms were listed on the NYSE (Jackson, ‘Corporate Governance in Germany and Japan’). The number of listed firms in Germany rose from 436 in 1983 to 933 in 1999. Jürgen Beyer, ‘Deutschland AG a.D.: Deutsche Bank, Allianz und das Verflechtungszentrum grosser deutscher Unternehmen’, MPIfG Working Paper 02/4 (March 2002).

23. Between 1990 and 1998 the investment funds' share of all German shares rose from 4% to nearly 13%. Ulrich Jürgens, Joachim Rupp and Katrin Vitols with Bärbel Jäschke-Werthmann, ‘Corporate Governance and Shareholder Value in Deutschland’, Discussion Paper of the Social Science Research Centre, Berlin, FS II 00-202 (2000); and Martin Höpner, ‘Corporate Governance in Transition: Ten Empirical Findings on Shareholder Value and Industrial Relations in Germany’, Discussion Paper 01/6 (Max Planck Institute for the Study of Societies, 2001).

24. Jürgens et al., ‘Corporate Governance and Shareholder Value in Deutschland’, p.15.

25. Compare Höpner, ‘Corporate Governance in Transition’, and Jeremy Edwards and Marcus Nibler, ‘Corporate Governance: Banks versus Ownership Concentration in Germany’, Economic Policy 15 (2000), pp.237–68. Jackson, ‘Corporate Governance in Germany and Japan’, shows that during the 1990s the proportion of shares held by ‘stable investors’ (banks, insurance firms, corporations, and the state) declined from 60.2% to 52.8%; while shares held by individuals, institutions and foreigners – who are much more likely to actively trade shares – rose from 39.8% to 47.1%.

26. Höpner, ‘Corporate Governance in Transition’; Jürgens et al., ‘Corporate Governance and Shareholder Value in Deutschland’.

27. Aggregate equity holdings by banks held steady during the 1990s, but from 1999 to 2003 they dropped from 13% to 9% of all outstanding equity in German firms; insurance companies and other financial firms (mostly investment funds) more than doubled their holdings, from 6.6% to 13.2% and 6% to 13.5% respectively, but this was largely portfolio investment: Sigurt Vitols, ‘Changes in Germany's Bank-Based Financial System: Implications for Corporate Governance’, Corporate Governance: An International Review (forthcoming).

28. The Economist, 14 August 1999; New York Times, 13 August 1999.

29. Mark H. Lang, Edward L. Mayhew and Douglas A. Shackelford, ‘Bringing Down the Other Berlin Wall: Germany's Repeal of the Corporate Capital Gains Tax’ (Unpublished ms, 21 January 2001).

30. The key financial firms at the heart of Germany's cross-shareholding system have reduced substantially since the mid-1990s their holdings in industrial firms. See Höpner, ‘Corporate Governance in Transition’, and Beyer, ‘Deutschland AG a.D.’.

31. The value of M&A deals also increased dramatically relative to GDP: Martin Höpner and Gregory Jackson, ‘Political Economy of Takeovers in Germany: The Case of Mannesmann and its Implications for Institutional Change’, Discussion Paper 01/5 (Max Planck Institute for the Study of Societies, 2001).

32. Beyer, ‘Deutschland AG a.D.’

33. Vitols, ‘Changes in Germany's Bank-Based Financial System’.

34. From 1990 to 1996 of the number of chairs held by bankers in the 40 largest corporations was steady, at around 40%; from 1996 to 1999 the number dropped to less than 25% (Höpner, ‘Corporate Governance in Transition’). In 2001 the Deutsche Bank announced its intention to give up all supervisory board chairs (Beyer, ‘Deutschland AG a.D.’). In 1974 banks held 20% of the supervisory board seats in the 100 largest firms; by 1993 this percentage had shrunk to 6.3% (Lütz, ‘The Revival of the Nation-State?’).

35. The median size shareholding (as a percentage of all shares) held by the single largest shareholder in a DAX 30 firm was 21.5% at the end of 2002; this compared to 5.3% for the Dow Jones 30 (Vitols, ‘Negotiated Shareholder Value’).

36. For more on the continuities in the financial system see Vitols, ‘Negotiated Shareholder Value’.

37. Vitols, ‘Negotiated Shareholder Value’.

38. Wolfgang Streeck, Social Institutions and Economic Performance: Studies of Industrial Relations in Advanced Industrial Countries (London: Sage Publications, 1992); Kathleen Thelen, Union of Parts: Labor Politics in Postwar Germany (Ithaca: Cornell University Press, 1991).

39. Though this general process of decentralization originates in the 1980s (see Thelen, Union of Parts).

40. Britta Rehder, ‘Pfadwechsel ohne Systembruch: Der Beitrag betrieblicher Bündnisse für Beschäftigungsicherung und Wettbewerbsfähigkeit zumWandl der Arbeitsbeziehungen in Deutschland’ (Doctoral Dissertation, Humboldt University, Berlin, 2002), p.275; Deutsche Bundesbank, Monatsbericht (Frankfurt: Deutsche Bundesbank Deutsche Bundesbank, February 2004), p.46. In the mid-1990s legal challenges to these clauses were invalidated by the Federal Labor Court, thus institutionalizing them as a new element of the industrial relations system, see Britta Rehder, ‘Conversion caused by Layering: Institutional Change in the German System of Industrial Relations’, Paper presented at the German Studies Association, New Orleans, 18–21 September 2003.

41. Rehder, ‘Pfadwechsel ohne Systembruch’, p.284.

42. Ibid., p.259.

43. Ibid., p.268.

44. Christine Trampusch, ‘Institutional Resettlement: The Case of Early Retirement in Germany’, in Wolfgang Streeck and Kathleen Thelen (eds.), Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford University Press, 2005).

45. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, p.33; see also Reinhard Bispinck, ‘Kontrollierte Dezentralisierung der Tarifpolitik – Eine schwierige Balance’, WSI Mitteilungen 57/5 (2004), pp.237–45.

46. Rehder, ‘Pfadwechsel ohne Systembruch’ and ‘Conversion caused by Layering’.

47. Rehder, ‘Conversion caused by Layering’.

48. Rehder, ‘Pfadwechsel ohne Systembruch’, Höpner, ‘European Corporate Governance Reform and the German Party Paradox’.

49. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, p.27.

50. Firms that have become more shareholder-oriented and introduced variable pay for management, tend to do so also for regular employees (and employees welcome this). A study of the top 100 firms showed that, in the late 1990s, 70% adopted performance-related pay and 57% had employee stock ownership plans (ESOPs). Antje Kurdelbusch, ‘The Rise of Variable Pay in Germany: Evidence and Explanations’, Paper presented at the Annual Meeting of the Society for the Advancement of Socio-Economics, Amsterdam, 28 June–1 July 2001.

51. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, p.29. Though works councils are reluctant to support a shift by management to an emphasis on publicly-stated profitability targets, since these might be used to justify closure of particular plants or subsidiaries.

52. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, pp.29–30. Where firms have resisted (some) shareholders demands for more radical restructuring, this has just as often been because both labor and management opposed it.

53. Jürgens et al., ‘Corporate Governance and Shareholder Value in Deutschland’.

54. Michel Goyer, ‘Corporate Governance, Employees and the Focus on Core Competencies in France and Germany’, in Curtis Milhaupt (ed.), Global Markets, Domestic Institutions: Corporate Law and Governance in an era of Cross-Border Deals (New York: Columbia University Press, 2003), p.57.

55. OECD, OECD Economic Survey: Germany (Paris: OECD, 2004), p.29.

56. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’.

57. Silke Bothfeld and Karen Ullmann, ‘Kündigungsschutz in der betrieblichen Praxis: Nicht Schreckgespents, sondern Sündenbock’, WSI Mitteilungen (May 2004), pp.262–7; Sigurt Vitols, ‘Investitionshindernis als Drohkulisse’, Die Mitbestimmung 12 (2004), pp.46–9.

58. Christel Lane, ‘Institutional Transformation and System Change: Changes in Corporate Governance of German Corporations’, in Glenn Morgan, Richard Whitley and Eli Moen (eds.), Changing Capitalisms (Oxford: Oxford University Press, 2005) argues that codetermination has become an empty shell, i.e. labor is coopted and has little power to affect outcomes.

59. Goyer, ‘Corporate Governance, Employees and the Focus on Core Competencies in France and Germany’.

60. See Jackson, ‘Corporate Governance in Germany and Japan’; Rehder, ‘Conversion caused by Layering’.

61. Anke Hassel, ‘Two Dimensions of the Internationalization of Firms’, Discussion Paper 01/3 (Max Planck Institute for the Study of Societies, 2001), p.40.

62. Jackson, ‘Corporate Governance in Germany and Japan’.

63. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, p.31; Ikuo Kume and Kathleen Thelen, ‘The Paradox of Globalization: Labor Relations in Germany and Beyond’ (Unpublished ms, 2002).

64. Wolfgang Ochel, ‘Dezentralisierung der Lohnverhandlungen in Deutschland – ein Weg zu mehr Beschäfigung?’, Ifo Schnelldienst 58/10–11 (2005), p.10.

65. Höpner, ‘European Corporate Governance Reform and the German Party Paradox’, p.35.

66. For more on Agenda 2010 see http://www.bundesregierung.de/Themen-A-Z/-,9757/Agenda-2010.htm.

67. Helmut Hauschild, ‘Starker Imageverlust für Gewerschaften’, Handelsblatt, 9 July 2004).

68. See OECD, OECD Economic Survey: Germany, p.36.

69. Laura Citron and Richard Walton, ‘International Comparisons of Company Profitability, Economic Trends, 587 (Bank of England, October 2002). Though one has to be careful about cross-country comparisons since statistical definitions vary; more useful is longitudinal data.

70. ‘Weniger Jobs trotz hoher Gewinne’, Handelsblatt, 24 March 2005.

71. Deutsche Bundesbank, Monatsbericht, pp.42–3.

72. ‘The Economy is Picking Up’, Deutschland (February/March 2005), pp.8–11.

73. ‘Deutschland gibt bei Patentanmeldungen Platz 2 ab’, Handelsblatt, 23 February 2004.

74. OECD, OECD Economic Survey: Germany, p.112.

75. Ibid., pp.112–16.

76. Silvia, ‘Reinventing the German Economy’, p.6.

77. OECD, OECD Economic Survey: Germany, p.25.

78. The Economist, 19 February 2005, p.72.

79. OECD, OECD Factbook 2005 (Paris: OECD, 2005).

80. Siemens is a good example of these trends. After far-reaching restructuring over the last decade, profits in recent years have been good and growing stronger. But over the past 12 years Siemens' employment in Germany declined from 253,000 to 167,000, while employment outside Germany grew 56% to 250,000. ‘Siemens Searches for a Vision of the Future’, Financial Times, 1 March 2004.

81. Compare OECD, OECD Economic Survey: Germany, and IMF, ‘Germany: Selected Issues’, IMF Country Report No. 04/340 (2004).

82. OECD, Main Economic Indicators, September (Paris: OECD, 2003).

83. Deutsche Bundesbank, Monatsbericht, p.46.

84. Source: Bundesverband deutscher Banken, http://www.bankenverband.de, downloaded 7 July 2005.

85. Silvia, ‘Reinventing the German Economy’, pp.4–5.

86. See ‘Auch kleine Firmen wollen Jobs verlagern’, Handelsblatt, 23 March 2004; ‘Siemens droht massive Stellenverlagerung’, Handelsblatt, 22 March 2004.

87. Silvia, ‘Reinventing the German Economy’, p.3.

88. From 1992 to 2002, German GDP growth averaged 1.4% while the euro-11 averaged 2.1% (Silvia, ‘Reinventing the German Economy’, p.3).

89. OECD, OECD Economic Survey: Germany, p.24.

90. OECD, Economic Outlook (Paris: OECD, 2002).

91. Silvia, ‘Reinventing the German Economy’, p.7.

92. Achim Truger, ‘Germany's Poor Economic Performance in the Last Decade: It's the Macroeconomy, not Institutional Sclerosis’, WSI Diskussionspapier Nr. 118 (September 2003).

93. Truger, ‘Germany's Poor Economic Performance in the Last Decade’. East German unemployment climbed to 18.7% by June 2003, thus adding considerably to the increase in overall German unemployment (Silvia, ‘Reinventing the German Economy’, p.5).

94. Source: Bundesverband deutscher Banken, http://www.bankenverband.de, downloaded 7 July 2005.

95. These numbers are the estimates of the non-accelerating inflation rate of unemployment.

96. Bertrand Benoit, ‘Germany's Two Halves Diverge’, Financial Times, 22 September 2004.

97. Truger, ‘Germany's Poor Economic Performance in the Last Decade’; Jan Priewe, ‘Ostdeutschland 2010 – Perspektiven der Investitionstätigkeit’ (Düsseldorf: Hans-Böckler-Stiftung, 2002).

98. OECD, Economic Outlook.

99. Bundesverband deutscher Banken 2004.

100. Truger, ‘Germany's Poor Economic Performance in the Last Decade’. See also Ronald Schettkatt, ‘U.S. Sclerosis?’, Challenge 47/2 (2004), pp.39–52.

101. Since 1996 German adjusted wage share has been declining faster than the EMU as whole, suggesting a greater decline in effective domestic demand in Germany (Truger, ‘Germany's Poor Economic Performance in the Last Decade’).

102. OECD, Economic Outlook; see also Jürgen Beyer and Anke Hassel, ‘The Effects of Convergence: Internationalization and the Changing Distribution of Net Value Added in Large German Firms’, Economy and Society, 31/3 (2002), pp.309–32. IMF data also show that, since the early 1990s, actual wage increases have been substantially below negotiated wage increases (IMF, ‘Germany: Selected Issues’, p.49).