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  Wirtschaftswunder 2.0: German Economic Boom Creates Job Machine

Wirtschaftswunder 2.0 German Economic Boom Creates Job Machine

By Christian Reiermann

Part 2: Schröder's Reforms Pay Dividends

The widely criticized labor market reforms approved by former chancellor Gerhard Schröder's government -- a coalition between his Social Democrats and the Green Party -- known as Hartz I to IV, are also having their intended effect. The unemployed are under greater pressure to accept new jobs. In addition, the recovery has given local unemployment offices more options to offer new jobs to the chronic unemployed, who in turn have fewer options to reject job offers without incurring penalties. Slackers must now expect reductions in unemployment benefits. The government employment agencies are also noticeably more motivated than in the past.

Ineffective job creation programs have also been slashed, and early retirement incentive programs have suffered a similar fate. The programs had tempted companies to send older employees into early retirement at taxpayers' expense. "Politicians didn't do everything wrong in recent years," says Wolfgang Franz, a labor market expert and a member of the German Council of Economic Experts.

But politicians can't take credit for the lion's share of the recovery. Instead, it's the parties to collective bargaining agreements -- that is, employers and unions -- who deserve most of the credit. For years they signed conservative collective bargaining agreements. As a result, unit labor costs either declined or, at the very least, didn't increase as much as in other countries. Referring, as they do, to the relationship between wages and productivity, unit labor costs are a meaningful barometer of an economy's competitiveness.

Their key message is this: A country has two options for increasing its competitiveness. Either it curbs wage increases or it raises productivity. Germany is currently doing both.

"It would be reckless for the unions to jeopardize this welcome development with excessive wage demands," warns Franz. However, his colleagues at Germany's top economic research institutes still have faith in the collective reason of the bargaining agents and they assume that the agreements to be reached this year will be ones that are economically sustainable.

Spurring exports

Franz believes that the current plan to introduce a minimum wage in Germany is just as counterproductive as agreements that set pay at too high a level. "This would jeopardize, once again, the flexibility that was gained through such painstaking efforts," says Franz. There is much at stake. Germany is currently experiencing a virtually unprecedented recovery, which, however, is due in part to foreign demand.

It was, after all, wage restraint and an attractive range of products that led to a rise in German exports in the first place. Add to that a dose of luck, as giant economic spheres develop in Asia and Eastern Europe. The countries in these regions are hungry for the kinds of products Germany is especially adept at producing: machine tools, complete factories and automobiles. Finally, the widely anticipated rise in consumption is now coming into play.

Skeptics who see the development as nothing more than a temporary economic upturn are now in the minority, and their arguments are steadily shrinking. Even the most unbudging of skeptics are switching sides. Axel Weber, the president of the German Central Bank, also sees no end to the boom, noting that the upswing shows no "sign of fatigue."

The perils of a rising euro

Nevertheless, there are risks that even the optimists won't deny. The further rise of the euro could jeopardize German exports, despite the fact that most goods are exported to countries within the euro zone. Moreover, the downturn in the United States could also damage the German economy.

However, experts see the risks with astonishing composure. They believe that Germany, because of its efforts to enact reforms, is better able to deal with such adverse influences than in the past, and they see the favorable response to the recent increase in the value-added tax as a positive sign. In the past, this would have been enough to stall the economy.

Even an ironclad certainty seems no longer applicable. In the past 30 years, unemployment was always higher at the end of an economic cycle than at the beginning, while base unemployment continued to increase.

Like other experts, Hilmar Schneider of the Bonn Institute for the Study of Labor is optimistic. "We are well on our way to breaking this trend," says Schneider.

Translated from the German by Christopher Sultan