ABSTRACT

At the latest since the onset of the euro crisis and Germany’s relatively good performance during the global financial and economic crisis of 2008-2009, the federal republic is revered as a new economic role model for other industrialised countries. While economic growth has not been overly impressive, at the time of writing unemployment in Germany is lower than in any other large European country or in the United States and lower than it has been for more than 20 years. The German public budget is almost in balance and the level of public debt measured as a share of GDP is also lower than in any other of the large OECD countries. Moreover, the German economy continues to expand its exports briskly and runs large current account surpluses. These stable macroeconomic conditions have made Berlin the new centre of power when rescue measures during the euro crisis were discussed, as it seems that Germany is the only country left having adequate financial resources to pay for bail-out programmes. In 2012, The Economist thus ran a large piece titled ‘Modell Deutschland über alles’ (14 April), strongly advocating other ailing economies to follow the German path of labour market reforms which have been implemented under the term Agenda 2010 by the social democratic chancellor Gerhard Schröder from 2003 onward. Volker Kauder, the chairman of the German ruling conservatives’ parliamentary group, proudly stated in 2012 that ‘all over Europe, German is now spoken’, implying that finally everyone was following the German policy approach, especially referring to Germany’s austerity stance which it had prescribed itself through a constitutional amendment in 2009. This amendment popularly referred to as the Schuldenbremse (debt brake) served as a blueprint for Europe’s recently passed fiscal compact, which forces euro countries to limit their own structural deficits to 0.5 per cent of GDP. Even though there is little academic literature to back such a simple narrative, the storyline usually found in the political arena and in the popular press is straightforward: Burdened with an excessive welfare state and sclerotic labour markets, the German economy experienced a protracted economic crisis in the early 2000s, with which the government headed by the social democrat Gerhard Schröder was struggling. After narrowly winning re-election in 2002, Chancellor

Schröder embarked on a comprehensive reform programme (called Agenda 2010) to overhaul the German labour market, the German social security system and an excessively large German public sector. The labour market became thus more flexible in terms of working times, redundancy payments and firing rules. Freed from the burden of the excessive welfare state, the German economy recovered from its year-long stagnation and started to outperform the rest of Europe again in terms of economic growth, employment creation and unemployment. Reading current comments on the German economy, it is startling how quickly the perception of the German model and the country’s economic fate has turned around. Until the middle of the past decade, both the domestic debate as well as the international perception had a completely different tone. In 2003, the Centre for European Reform labelled Germany ‘the sick man of Europe’ (Barysch, 2003). In the same year, the leading German economist Hans-Werner Sinn published a book titled Ist Deutschland noch zu retten? (‘Can Germany be saved?’1) with the conclusion that unless very radical reforms are implemented, Germany was doomed economically. The book was followed by other works, written by economists or leading journalists, all predicting the German demise. At the time of their implementation even the Schröder reforms were not seen as a game-changer. Hans-Werner Sinn judged them in 2007 as not being ‘a real breakthrough’ (Sinn, 2007: 109), and the German Council of Economic Advisors repeatedly claimed that they were not far-reaching enough. Interestingly, the same reforms are now often proclaimed at having been crucial for the German economic performance since the middle of the past decade. This quick change in perception leads one to wonder how far the narrative of strengthening the German economy through decisive reforms of the Schröder years really is accurate. If this narrative was true, why was the recent improvement in economic conditions not seen by leading German economists when the Agenda 2010 package was passed? In addition, if the narrative was accurate, how far can these reforms be copied by the rest of Europe? In order to answer the above questions this chapter will first describe the elements of the Agenda 2010 labour market reforms and will link them to Germany’s macroeconomic performance. Then, some problematic elements of the German performance will be pointed out and in a last step it will be asked what would happen if all countries in Europe followed a similar path.