Why has the German Job Market Done Astonishingly Well Despite the 2008–2009 ‘Great Recession’? New Economic Miracle, Institutional Transformation or Beggar-thy-Neighbour Policies?

Abstract

Since the early 2000s, the German labour market has undergone a sweeping institutional transformation. While during the 1990s and early 2000s, Germany was usually regarded as the ‘sick man of Europe’, the country's economy has recently been described in many respects as an international role model. Around a decade ago, a reform package was introduced that resulted in the unemployment rate being almost cut in half, in spite of the difficult economic climate due to the financial crisis and the succeeding and still ongoing problems in the Eurozone. However, the success has also been challenged due to its alleged internal and external unpleasant side-effects by critics. After having explained the essence of the German social market economy and its development prior to the deep downswing of 2008/2009 which was coined the ‘Great Recession’ by leading US economists, the paper summarises the key aspects of the rather unexpected German labour market successes since 2009 and addresses claims of related distributional injustice of these reforms within the country as well as assertions that the German success of ongoing high exports and current account surpluses is based on beggar-thy-neighbour policies. Finally, the paper briefly asks whether Germany has faced up to its responsibilities during the crisis in the Eurozone since the end of 2009.

Key words:

• German labour market
• new miracle
• institutional transformation
• uncooperative beggar-thy-neighbour policies
• Eurozone crisis

Notes

1 Indeed, there has been an ongoing controversial debate on the recently steadily rising German export surpluses for some time. Especially, US economists such as Paul Krugman (2013) have attacked with sentences such as ‘Germany failed to make any adjustment at all’, that ‘Germany's failure to adjust magnified the cost austerity’ and that it beggars its neighbours and the world. Moreover, he states that German officials ‘consider their country a shining role model, to be emulated by all’. These criticisms, which are to some extent wrong (Krauss, 2013), are hardly justified similar to the ones by US treasury. However, other nobel-prize-winning US economists, such as Michael Spence (2012) and Edmund S. Phelps (2012), have supported, in principle, the response taken within the EU inspired to a noteworthy extent by German economic thinking. This academic support of the German official position has been often entirely neglected or at least downplayed in the public debate (Funk & Allen, 2012).

2 This is despite of the concessions that have been agreed by creditor countries governments such as, amongst other things, extensions of pay-back periods of public loans to countries in crisis.

3 Recent consultations by experts to the House of Lords have demonstrated that the approach supported by Germany officially is by no means necessarily flawed, as some commentators claim. This is true especially when taking into account Germany's ‘need to secure parliamentary and public support for its position’ (House of Lords European Union Committee, 2014, p. 13).

4 Amongst other things, this depends on the net effect of governmental policies which may on net increase the burden on German business and parts of consumers to such an extent that the entire growth effect may be negative in the medium term.