Monday, September 28, 2020
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Germany risks rolling back its strengths

Germany has once again become the world’s favourite whipping boy, roundly criticized by the US Treasury, a top IMF official and the European Commission president, among others, for running record trade and current account surpluses that are supposedly detrimental to the European and global economy.

The arguments continue, with the Germans themselves saying that the surpluses are simply the happy result of the nation’s industrial competitiveness and don’t hurt anyone else. Lost in the debate, however, is what’s happening in Berlin right now.

As Chancellor Angela Merkel forms a new coalition government, she appears to be on the verge of throwing out some of the very policies that underpin the export boom of the past decade.

Most controversially, the new government is likely to introduce a minimum wage, a novelty for Germany, and a move that both symbolically and in reality would herald the end of the tough wage restraint that has characterized the past decade. A range of social policy changes, including a possible reduction in the retirement age, are also being discussed, as is higher government spending.

It’s not clear whether such shifts would provide the boost to domestic spending that the US and Germany’s other critics are demanding. But their very prospect is sending chills down the spines of German business leaders. Ulrich Grillo, president of the Federation of German Industries, warns that “Germany can’t afford a grand coalition of election gifts,” and says that the politicians are acting as though Germany’s continuing prosperity is a given, rather than something that needs to be worked at.

Deutsche Bank says flatly in a research report that the proposed minimum wage is “the wrong policy choice.” The shifts in economic policy are coming about as a result of political necessity. Merkel scored strongly in the September 22 parliamentary elections, but her Christian Democratic Union party didn’t win enough votes to govern alone. The party’s top officials have spent the past few weeks locked in negotiations with the opposition Social Democrats over the shape of a coalition government, and they have already given way on a number of points, including the introduction of a minimum wage of 8.5 euros per hour (about $11.50 at current exchange rates).

Germany is unusual in that it doesn’t currently have a national minimum wage; pay scales for different industries are traditionally fixed by management and union organizations, in regular rounds of negotiations. Two elements of the planned minimum wage are notable. The first is the level being proposed, which is 45 per cent above the US minimum wage – considerably higher than that in some other European countries such as Spain, although below France and the Netherlands.

The second notable element is its expected broad application, across the whole of Germany, East and West, and including new entrants to the job market. This amounts to a rollback of the stringent policies put in place by Merkel’s predecessor Gerhard Schröder, starting in 2002, at a time when the German economy was struggling to digest the impact of reunification after the fall of the Berlin Wall.

Schröder, a Social Democrat, worked together with the former head of human resources at Volkswagen, Peter Hartz, to devise policies that created jobs, in part through the introduction of low-paid “mini jobs” that were exempt from social security charges. These were designed to get hard-to-employ people back into the workforce.

The result has been spectacular: Germany’s current unemployment rate, of just over 5 per cent, is half what it was a decade ago, and far below the 12.2 per cent average jobless rate in the euro zone. And German productivity gains since then have far outstripped the modest rise in unit labour costs, propelling the current export boom.

Currently, about 12 per cent of workers in Western Germany earn below 8.5 euros per hour, while in the eastern part, the figure is about one in four, according to research by the IWH institute in Halle.

Deutsche Bank is now predicting that the planned minimum wage would reverse some of the beneficial effect of the Hartz reforms and would likely increase labour costs generally, because the 8.5 euro level would be close to the median wage. The bank estimates that between 450,000 and one million jobs will be lost as a result.

In theory, the minimum wage would boost overall purchasing power, going some way to address the international criticism.

But Hans-Werner Sinn, head of the IFO Institute for Economic Research in Munich, argues that it would merely push up the price of German goods and make them less competitive, without leading to a significant increase in consumption of imports. “There will be a bitter sobering up,” he warns.

For their part, advocates of the minimum wage argue that similarly dire gloom-and-doom scenario predicted in Britain back in 1998, when the government of Tony Blair introduced one, have failed to materialize. The British minimum wage is the equivalent of $10 per hour, below the planned German level.

However, the British one is scaled so that apprentices and those under 21 receive substantially lower amounts.

The Social Democrats are also trying to reduce the statutory retirement age of 67 for some categories of workers, and there are ongoing talks about how to use a $40 billion surplus in the nation’s state-run retirement fund. The Social Democrats and some members of Merkel’s own party are arguing that it should be spent, while others say the compulsory levy on wages that is used to finance the fund should be reduced.

Merkel herself has said she won’t agree to policies that would jeopardize jobs. Still, whatever the eventual outcome, it’s already clear that Germany’s economic policy is in for some important changes. The US Treasury and Germany’s other detractors should take note.