Brussels, September 19th, 2011 Germany‘s Economic Policy: Role Model or Threat for the Euro-Area?...

Brussels, September 19th, 2011

Germany‘s Economic Policy: Role Model or Threat for the

Euro-Area?

European Social Conference: Balancing social and economic policy during the first European Semester

Workshop on National Reform Programs Brussels, 19th of September 2011

Florian Moritz - Economic, Finance and Fiscal Policy Department - German Confederation of Trade Unions

DGB, Abteilung Wirtschafts-, Finanz- und Steuerpolitik Brussels, September 19th, 2011

Overview

The National Reform Program of Germany: No (new) answers to our problems

The reaction of the European Commission: Germany as a role model?

The new economic governance in Europe: Very German

What we need: There must also be a change in German economic policy

(symmetric rebalancing of the Euro-Area)


Germany‘s National Reform Program

NRP 2011:• published by the german federal

government April 6th 2011

• structure closely follows that of the preliminary NRP (“Draft NRP”), which was submitted in November 2010

• DGB and other civil society organisations commented on the early „Draft NRP“

• DGB and employers‘ organisations were also invited by the Ministry of Economics and Technology to discuss the draft

• Hardly any attention was paid to the objections that DGB raised


Germany‘s National Reform Program

The NRP 2011 contains the following elements:• Medium-term scenario for the country’s economy• Translation of the five ‘headline targets’ agreed upon

at the EU level into national targets:Promoting employmentImproving the conditions for innovation, research, and

developmentAchieving the (previously set) targets for climate

protectionImproving educational attainmentPromoting social inclusion, in particular by reducing

poverty

• German Action Programme 2011 for the Euro Plus Pact

• General overview of key political measures of the Federal Government and the Länder to strengthen growth and employment

• Brief account of the use of EU structural funds


Government says:„European Council has identified three indicators for defining sections of the

population affected by poverty or exclusion: 1) percentage at risk of poverty, 2) material deprivation and 3) percentage of the population living in jobless households. The choice of an appropriate indicator is left to the discretion of the member states. (…) In defining its quantitative target, the Federal Government takes the concept of individuals living in jobless households, and applies it to the specific German situation.“

We say:• Setting targets for „Persons in jobless households“ is to easy: By the time the NRP

was submitted, the government was already certain to achieve a reduction in unemployment.

• The indicator – especially when focussing on long term unemployed – is easy to manipulate: Unemployed that find a job for a short period of time are not long-term unemployed anymore, while their social situation is not changing. Many long term unemployed vanish from the empirical data, because they reach retirement age.

• The focus on only one indicator gives the false impression that the percentage of persons at risk of poverty is no problem in Germany.

Germany‘s National Reform ProgramReducing Poverty ?


Poverty is a problem in Germany:

Data for 2008:Poverty rate (Persons with less

then 60% of median income) rose from 10.3% in 1999 to 14%

East-Germany: poverty rate is as high as after the reunification

Single mothers with up to 3 year old kids: more then 50% are poor

7 % of employed are „working poor“

DGB asked government (without effect) to include poverty risk into the NRP


Poverty rate & Gini coefficient



Rise in poverty is closely connected to rise in fuctional income inequality due to growth of „bad jobs“.

• While property and entreprenueral income grew 48% since 2000, the increase in income of employees was only 14% (not price adjusted).• 75% of the jobs created in the upswing of 2010 were „atypical“ (low pay) jobs. Today only 60 Percent of the people employed in Germany have a

standard employment relationship. The others are forced to work part-time, have „minijobs“or are temporary workers


Germany‘s National Reform ProgramStrengthening growth and employment?

Rising inequality, social cuts, irregular jobs and stagnation of employee-income are responsible for the biggest economic problem in Germany: stagnation of domestic demand & unbalanced growth.

3,4%2,7%

1,0%

-4,7%

3,6%

1,4%

-0,2%

0,7% 0,5%

8,0%

4,7%

2,5%

6,0%

13,1%

7,6%

2,5%

-14,3%

14,7%

11,9%

5,0%

3,3%

-9,4%

13,0%

-0,2%

-10,1%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

2006 2007 2008 2009 2010

GDP

Consumption households

gross fixed capital formation

Exports

Imports

Components of GDP growth (compared to preceding year)



Does the government tackle Germany‘s biggest economic problem?

NRP 2011 (German Action Programme for the Euro Plus Pact & key political measures to strengthen growth and employment):

•Fostering competitiveness & employment by investing in education & Infrastructure

•Reducing public debt (constitutional Debt Brake, deficit below 3%-limit already in 2011)

•Reinforcing financial stability

•Strengthening domestic demand (by more deregulation, liberalisation and competition and only by supply-sided measures)



DGB: No! The government doesn‘t tackle Germany‘s biggest problem!

NRP 2011 contains nothing new: focusses on supply-sided measures to reduce companies‘ costs and on fiscal austerity; progressive measures receive inadequate attention:

•Plans to invest in education & ecological modernisation (energy saving & -infrastructure) are a good idea but not ambitious enough.

•Fiscal austerity and consilidation is not only anti-social, but economically counter-productive: spending cuts lower domestic demand & the growth potential (lack of public investment…).

•Regulation of the financial sector is to weak, further plans are missing or not of big use.

•Envisaged measures don‘t support domestic demand: Germany has no supply-side problem! Further deregulation & liberalisation puts more pressure on wages and working conditions (= reduces private demand); public investment is much to low


Country-specific Recommendations The European Commission‘s view on Germany

The Commission is happy with Germany‘s NRP:- praises German competitiveness, - only has 4 short recommondations, which support the existing

German plans,- wants Germany to continue it‘s fiscal consolidation course,- wants Germany to liberalise („remove unjustified restrictions on

certain professional services“) and strengthen competition in former public sectors (network industries…).

Looking at the Commission‘s recommendations for other countries, it seems that the Commission is seeing Germany as a role model. Other countries are asked to:

reduce social welfare costs (as germany did),extend the retirement age (as germany did),boost competitiveness in general and put pressure on wages (as

germany did),cut government spending & public debt (as germany did and is

doing).


Economic Governance Proposals „Euro Plus Pact“ & „Six Pack“: very German

Beside consolidation of public households, especially: promoting competitiveness

Euro Plus Pact: Pressure on wages by „decentralisation“ of the bargaining process, by „ensuring that wage settlements in the public sector support competitiveness“ etc.

„Six Pack“: New mechanism against „macroeconomic imbalances“ is still asymmetric: Especially Countries with current account (trade balance) deficits are forced to adjustments (cutting costs).

Real effective exchange rates (based on unit labour costs; Performance relative to the rest of the former EU-15; double export w eights)

80

85

90

95

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Germany

Ireland

Greece

Spain

France

Italy

Netherlands

Austria

Portugal

Germany

Greece

Spain

Portugal

Loss o

f

com

petitiv

eness

Incre

asin

g

com

petitiv

eness

-> All countries are forced on the german path


Economic Governance Proposals „Euro Plus Pact“ & „Six Pack“: very German


German Economic Policy: No Role Model but Threat for the Euro-Area

If all countries follow the german example:

Wages fall &government cuts

spending

Demand goes down

Exports of Germany(and other surplus countries) go down

and

GDP shrinks & employment falls

Deflationary development


The Solution: Symmetric adjustment of imbalances

Instead of cutting wages in deficit countries

Instead of social cuts in deficit countries

If deficit countries are to boost exports

-> we need higher wages in germany (by regulating labour markets, curbing the low-pay sector, establishing a minimum wage of 8,50 € /hour etc.).

-> we need a revision of social cuts in germany

(retirement age, unemployment benifits etc.).

-> Germany needs to strenghten domestic demand & imports (higher private income, but also higher public investment).

„High Road“ to rebalancing the Euro Area in a socially just way


Thank You!

Contact: [email protected]

Brussels, September 19th, 2011 Germany‘s Economic Policy: Role Model or Threat for the Euro-Area?...

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