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Understanding Germany

by Elaine Schwartz    •    Jun 28, 2012    •    192 Views    •    TIME TO READ: 1 minute

Are Germans thinking, “We did it and now it’s your turn?”

Ten years ago, Germany’s unemployment rate averaged more than 9% and economic growth was close to zero. Jobless workers, depending on their family status, were receiving 60-67% of their former wage for 32 months and 53-57% thereafter. Not only were the payments expensive but so too was the army of government employees needed to calculate them.  In addition, because government regulations made it difficult to fire anyone, businesses avoided expansion.

With structural reform the solution, the German political leadership asked a Volkswagen executive, Peter Hartz, to lead a commission. In the economically depressed eastern half of the country, thousands of unhappy German workers  protested in the streets.

The Hartz Commission targeted workers, businesses and government.

  • Hoping to diminish work disincentives, they lowered unemployment benefits. Workers would receive basic welfare after 12 months with a rent and utility subsidy.
  • Knowing that the right to fire made hiring more attractive, businesses could create temporary, low paying mini-jobs.
  • And finally, lower unemployment benefits and more business activity meant lower deficits.

 

Perhaps we could call it tough love.

Now, the German economy is healthy. In his Boomerang chapter on Germany, Michael Lewis says, that either the weaker euro states must join in a German funded fiscal union (sort of like the connection between Indiana and Mississippi) or the weaker nations must endure structural reform. “The first solution is pleasant for the Greeks [and the other peripheral states]. The second solution is pleasant for Germans but painful, possibly even suicidal, for Greeks.” (p. 141)

Knowing about German austerity, do you think Germans can accept less from their euro zone relatives?

This Planet Money podcast does a good job of briefly explaining German austerity and the Hartz Commission while these 2002-2005 news articles, here and here provide the ongoing narrative.

 

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