The German locomotive pulls the brake

  • Italiano

Perhaps not so many of you recall what were Germany’s economic data just ten years ago. In 2000, the weekly magazine The Economist invoked the Teutonic State as “Europe’s sick man”, whereas in 2004 the German economics suffered again a deep recession which became part of an apparently unstoppable parable of decline, with no precedents in terms of its length (almost fifteen years). This is when the Chancellor Gerard Schroeder gave an impulse to a structural plan of economic reforms which proved to be providential for the German State and devastating, in electoral terms, for the center-left wing captained by SPD. This is what later took the name of “2010 Agenda”.

Interventions involved all the branches of the economic system and among the most important measures were the following: was shortened the period of unemployment, were rewritten in a more flexible way the rules concerning dismissal, and was made almost compulsory the acceptance of a job for the unemployed so as not to lose their right to subsidies, was reduced the fiscal burden on work, was created a more fluid system of transition from school to work, was simplified the bureaucratic side of apprenticeships, and were introduced much more stringent rules for medical coverage.

The plan was ambitious and with hindsight, we could say it was fruitful, but if we wanted to be meticulous, nothing would have been possible if the decision to violate the Stability Pact for three years in a row had not been taken.

Put in these terms, it may seem to be a bestial thing to say that the standard bearers of austerity and of accounting stability, more than once ignored the deficit limits imposed by the Maastricht Treaty and used more resources than public finance would allow. Yet, this is how things happened.

The German deficit grew and reached 3.9% in 2004, after having already scored a 3.8 during the previous year, but nothing happened in the European context, there were no shrieks to invoke accounting stability and the deficit spending was done. That was it.

The mix of reforms and elasticity in public spending was productive and Germany overcame its 15-year-long crisis and started a growing process which transformed it into the “hegemonic” economic system on the continent.

In spite of all the consequences of the reform plan, the coalition government lost all the regional elections and, after the defeat in Norreno-Westfalia, it was constrained to hold early elections and lost them as well, clearing thus, the path for Grosse Koalition which brought Angela Merkel to the rule of the country.

Nonetheless, it seems that something no longer works today, or better, that the news about the solidity of the German model are, at the very least, exaggerated.

If we take a look at Germany’s growth rate between 2000 and 2014, it was well below 1.5%. It placed the German state at the bottom of the European States ranking: 13th place out of 18. Besides, the renowned Hartz reform, which inspired Renzi Government’s Jobs Act, has reduced unemployment, but the result was obtained due to widening the basin of precarious, part-time, and underpaid workers (with the inclusion of the so-called minijob). The result was that the total amount of hours remained virtually the same. Besides, it further increased the number of residents who qualify for state subsidies to integration of low income.

At the time, the reform system had a “freezing” effect on wages, compressing domestic demand and allowing the country to gain competitive advantage compared to other European States which were did not make it to impose the same conditions on their workers.

The boom in German exports was made possible mainly by the fact that other countries of the continent did not follow the same wage policy, but maintained a level of demand capable of absorbing German exports, certainly not due an increase of Germany’s productivity rate which was one of the lowest on the continent for decades.

The collapse of domestic demand, the competitive advantage given by the work costs and a generalized blocking of investments in infrastructure incited Germany’s trade surplus which represents today  both its major force and its real weakness.

Today the Teutonics are under the spotlight because of the scandal concerning Volkswagen’s “Dieselgate”. This will weigh remarkably on the economic data of Deutsche Bank, which represent the true financial engine of the State, but the real danger  is the result of the unbalanced exposure of the entire economic system toward export. The crisis of the European demand, which in any case, represents the main outlet of German products, as well as the worldwide situation, with the slowdown on Asian markets, first of all in China, and that of all the BRICS panorama will surely not allow to keep past amounts, causing a slowdown in production amount and higher costs for the maintenance of the warehouses for the unsold goods. The German locomotive pulls the brake.

The internal market of a nation is, in fact, the main tool for the consolidation of the inner economic system, by making production and growth less dependent on exogenous shocks, a detail that has not been taken into consideration in Germany and which, probably, will cause a new internal stagnation or even recession in the near future.

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