Wednesday, March 13, 2013

Germany's structural reforms - Role model but not a blueprint

Ten years ago, Germany ended its reform deadlock. The reforms of the Agenda 2010 have contributed to the current strength of the economy but are no blueprint for the rest of the Eurozone.

Today, it is exactly ten years ago that then-chancellor Gerhard Schröder gave his blood-sweat-and-tears speech in the German Bundestag, preparing the country for a series of economic reforms, known as the Agenda 2010. The current strong economic performance of the German economy combined with a balanced budget has given rise to new celebrations of the Agenda 2010, proposing it as a blueprint for structural reforms in the rest of the Eurozone.

The structural reforms were mainly aimed at making the labour market more flexible, creating more jobs and making social security systems more sustainable. The main tools were a reduction of unemployment benefits, privatisation of job agencies to bridge the mismatch between vacancies and job-seekers and tax reductions. In the first two years after the start of the reforms, German unemployment actually continued to increase and breached the 5-million mark. It took until 2006 before the economy started to accelerate again. The economic recovery, however, was not only the result of Schröder’s reforms. The reforms also coincided with wage moderation (even embraced by the unions), corporate restructurings and outsourcing, low interest rates and a favourable global economy with the emergence of the Chinese economy as an important trading partner. Interestingly, the first two years of structural reforms were accompanied by only mild fiscal austerity. Between 2003 and 2006, the German cyclically-adjusted deficit improved by roughly 0.5% GDP on average per year.

During the 2009-crisis, the labour market benefitted from earlier reforms but also – and probably even more – from fiscal stimulus (car scrap scheme) and the subsidised short-time work schemes.
The empirical success of Schröder’s reforms is still disputed. While proponents point to the new strength of the labour market and the economy, critics stress the increases low-wage sector and the growing phenomenon of working poor. Indeed, in the first years of the reforms, new jobs were almost exclusively created in the low-wage sector. This, however, has changed. Since 2010, employment growth has spread through the entire economy, starting to support private consumption.

For the German economy, Schröder’s Agenda 2010 was crucial – not only in terms of the actual but also in a broader meaning. The reforms ended a period of self-pitying about the German role as sick man of Europe and reform deadlock. However, while this symbolic impact can clearly be used as a role model for other Eurozone countries, the actual reforms should not necessarily be used as a reform blueprint. Each Eurozone country will have to find its own blood-sweat-and-tears Agenda 2020.

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