From the TUC

Thoughts from Berlin: The German Labour Market & the Eurozone Crisis

11 Nov 2011, by Guest in Economics

Yesterday I went an excellent conference in Berlin organised by the Friedrich Ebert Stiftung on ‘Recovery & Recession in Britain and Germany” featuring parliamentarians, economists, think tankers and trade unionists from both countries.

For a one day conference a lot of ground was covered – from fiscal policy to the challenges of generating growth to questions of how prepared we are for the next crisis. I was especially interested in some of the discussions around how linked the UK and Eurozone banking sectors actually are – something I will blog on in the future.

I thought in this short post though I’d concentrate on just two issues that particularly struck me – labour market performance and the ongoing Eurocrisis.

The Labour Market

Perhaps the most striking chart shown was the one below (reproduced here using data from Eurostat):

This rebases GDP and employment to 100 in Q1 2008 and shows how they have progressed since then.

The solid lines show GDP – in both the German and UK cases we see a deep recession with output falling by around 7%, in the German case we then see a strong recovery to the pre-crisis peak – something that still eludes the UK.

But what are much more interesting are the checked lines – which show employment. Whilst the UK recession was notable in that unemployment did not rise as much as in previous downturns, the German case is simply staggering. As of Q2 2011 in the UK employment was down around 3% on 2008 pre-recession levels, in Germany it is about 4.5% higher.

The German policy of ‘short time working’, whereby employers accepted reduced hours and the government helped top up their pay, was cited as the main reason for this.

This policy, and the associated labour market structures, has been praised in the past few years by the FT, the IMF and the OECD. The main concern cited in 2008-09 was that such schemes might help employment in the actual recession but would ultimately hold back employment growth in the recovery – such worries appear to have been unfounded.

Replicating this in the UK would not of course be straight forward but it is certainly an area that needs close study.

Eurocrisis

The Eurozone’s continuing crisis over shadowed much of the discussion. The SPD (and Green) politicians in attendance seemed especially concerned by the position of the German government in opposing Eurobonds and not supporting a ‘Marshall Plan’ like programme of European investment in the periphery. They worried that huge damage was being done to European unity, to Germany’s position in the world and ultimately potentially to the German economy. The contrast of a German government introducing tax cuts in the same week as France and Italy passed new austerity packages was noted.

There was a general feeling that heavy ECB intervention in the Italian bond market would be required, although this was coupled with a worry about the ‘democratic deficit’ created by an increasing powerful ECB being essentially unaccountable to the European people.  There was also a sense that the argument had to be made to the German people that ECB actions would not necessarily lead to high inflation.

I was struck to hear an opposition party prepared to make difficult arguments for the good of the European economy rather than taking the easy road of populism and simply attacking the CDU/FDP government for the (very) limited steps it has already taken.

The conference ended though on a worrying note – asked by a British delegate whether he thought the German government had a plan in case of one or more Eurozone states defaulting or exiting the single currency an SPD politician replied ‘No’.

3 Responses to Thoughts from Berlin: The German Labour Market & the Eurozone Crisis

  1. jonathan
    Nov 12th 2011, 3:30 pm

    I’m surprised you didn’t take the next logical step. You say keeping employment up didn’t hurt. Why not say it helped?

    Look at it from the perspective of those who argue for the importance of “confidence”. They’ve been saying the best way to boost confidence is through cutting employment and programs because reducing debt is the best lever. It’s extremely difficult to say that belief has worked in any way.

    There is another argument for “confidence”. It is the one you almost reached: that keeping up employment is a much better lever for lifting confidence. This argument has been dismissed – and politically derided as out-dated and ineffective Keynesianism – but it works also as a supply argument.*

    The argument isn’t even difficult: employed people need work, so they produce and the bosses have confidence to produce because they have people working. There are then 2 more parts. First, though Germany is export driven, domestic consumption is of course most of the economy so any producer making for domestic buyers has more confidence because people are working. Second, the slack is put to use – and there is slack because people are working short hours. Producers use that slack to improve products, improve procedures, etc. and that makes them more competitive. This might sound counter-intuitive but these measures cost and that slack, those extra man hours, pays for that cost. So bottom line, a jobs first policy comes out of the mess with better employment, higher GDP and companies that are in better shape with better products and processes. That’s just a confidence argument, not a Keynesian demand statement.

    (*This, btw, is one of the main problems I have with economics generally: the extreme confusion about the relationship between supply and demand beyond the basic curves. We see the same thing in biology – natural selection meets genetic drift, etc. – but the biologists work at figuring it out while economists argue their political points of view as though they are writ by God.)

  2. jonathan
    Nov 14th 2011, 9:32 pm

    I note Paul Krugman mentions in his blog that work suggests unemployment is a worse hit to individual confidence than wage reductions, etc. Since confidence is an aggregate, it again makes me wonder why people can’t connect the dots: unemployment depresses output because there is no confidence.

  3. Oxford Kevin
    Nov 23rd 2011, 11:23 am

    I wouldn’t call the German recovery strong, all it is, is stronger than the UK recovery. For the German recovery to have taken over 3 years for Germany to return to its pre-recession level seems like a pretty poor recovery to me. This highlights just how bad the UK recovery has been.

    Kevin