Getting the policy mix right – in Germany and the UK
It’s easy, when looking at the strongest economy in Europe, with low unemployment, a strong commitment to environmentalism, a vast array of world beating companies and a tradition of social solidarity, to imagine it to be some sort of economic perfection. But, of course, Germany faces its challenges like every other country. The constant need for economic renewal that goes with globalisation affects the Germans as it does everybody else.
For this reason, the OECD Economic Survey of Germany is an important document. The OECD is correct point out that Germany faces a cyclical return to slower growth. Moreover, Germany’s export-led model faces obvious problems if many of the countries to whom it exports face deficit reduction programmes and consequently falling demand. But I think there are serious flaws among the OECD’s prescriptions for Germany. The wrong policy mix won’t help Germany meet its challenges: it will only make matters worse.
The OECD is right to say that Germany must transform its growth model to thrive as a knowledge-based economy. Increasing the labour participation of women and older workers is also a point well made (as is improving the supply of childcare), although this is not the main issue affecting domestic demand. To boost demand at home, Germany must stop suppressing its wages. A minimum wage for those at the bottom end is necessary. Regarding those earning above the minimum wage, the jury is out on whether German unions deliberately moderate wage demands in return for job security or whether wage suppression is a demonstration that unions are not as strong as many think.
In tandem with boosting wages at home is a more general acceptance that, as a player in the global economy, Germany must import as well as export. That requires an acceptance in Berlin that world economic imbalances between surplus countries – including China and Germany – and deficit countries – including the US and much of Europe – are not sustainable in the longer term.
But my main concern with the OECD report comes in the quote from its Secretary General, Angel Gurria. Mr Gurria says: “Many other countries are looking at the German mix of labour market reforms, social partners’ constructive flexiblity and sound fiscal policy”. It is not labour market reforms, that old chestnut, that has made Germany Europe’s strongest economy in the last sixty years. The main reasons for that strength are Germany’s record of skills investment, its powerful mittelstand of medium sized companies, and its Social Market Model, that does involve constructive flexibility, but that also gives works council representatives, usually trade unionists, a powerful place in determining company decisions, supporting corporate growth while also defending their members. Germany has also had successive governments, Social Democrat and Christian Democrat, who have been prepared to make strategic interventions in support of key industrial sectors, rather than adopting an attitude that says the market rules and the devil take the hindmost.
These issues are explored in the TUC policy paper, ‘German Lessons’. I hope Vince Cable has read his copy. I don’t agree with some of what he says, but I was very impressed with his call for a long-term plan for industry, as reported in the FT earlier this week. Winning this argument with the Treasury is another matter, of course, but Vince hit many of the right notes in his letter to the Prime Minister and the DPM. As in Germany, we need to get the policy mix right, but Vince seems to acknowledge the scale of the problem and that’s a good place to start.