Tuesday, 28 January 2014

Vorsprung durch Austerität?

One of the most common German objections to a critique of austerity will go something like this: 'What's wrong with austerity? We went through tough labour-market reforms, welfare cuts and have limited our government spending and look how well Germany is doing now.'

The main problem with this view is of course that Germany is not doing well. That's both in terms of economic growth and in the terms of living standards.

Clearly, German growth has been much stronger than in Greece, Spain and in the other crisis countries. But that's not because Germany has done so well but because these countries have done so badly. If you compare Germany's economic performance with the average of the OECD countries (a selection of the world's economically most advanced countries) there isn't much to brag about. Since 2007, when the crisis hit most countries, German growth has been above average only in four years and mostly not by more than a percentage point. In two years it was below average. That includes 2012, the last year in the statistic, when average growth in the OECD was 1.5% while Germany  grew at a meager 0.7%. If you compare Germany to the US, its performance looks even weaker. The American economy grew 2.8% in 2012. That's four times the German growth rate. And that's despite the fact the German growth is propped up by unparalleled export surpluses.

There is no question that Germany has done better than many other countries: it is one of the few countries in Europe to have reached pre-crisis output levels again. The GDP of most other European countries is still below what is was before 2007. But that does not change the fact that being at 2007 output levels when it is 2014 is no reason for celebration.

The weakness of growth in Germany has also had a negative effect on employment. This is sometimes obscured by good unemployment statistics: German unemployment is low at 5.5% (2012). But to some extent this reflects more institutional arrangements than economic strength. The average number of hours worked per worker has declined substantially from 1422 in 2007 to 1397 in 2012. In other words, after seven years of 'recovery' employment has still not returned to pre crisis levels.

Not only is Germany's economic recovery rather anemic but its benefits are also distributed very unevenly. Substantial parts of the German population are experiencing low or declining standards of living. Real wages declined from the early 00s and have only started to grow again recently. In 2012 they were at the same level as in the late 1990s. Partly as a result of this even many workers in full time employment have to rely on forms of public subsidies to make ends meet. Those who completely live off public subsidies feel the effects of the welfare cuts of the last decade. For many Germans even the weak recovery does not coincide with improving standards of living. A recent survey found that the poverty risk in Germany is below EU average. But it is still higher than in all of Germany's neighbors with the exception of Poland.

Germany is also falling behind in many other areas that depend on public funding. In international comparisons German schools, universities and infrastructure are rarely rock bottom. But neither can do they occupy top spots.

The weak economic development and the standard of living crisis are direct results of Germany's own austerity policies. Mainly under the auspices of Gerhard Schröder's Agenda 2010 the labour market was liberalized and welfare provisions were cut. Subsequently, public spending was restricted by legislation limiting deficit spending. These policies resemble closely those applied today in the European crisis countries and have similar effects. The weak development wages, benefits cuts and restrictions on public spending have depressed domestic demand. The result are depressed levels of investment and weak growth.

That the economic results are not worse is due to the fact that the weakness of domestic demand has in part been compensated by extraordinarily strong exports. (It is far from clear that low labour costs are responsible for the export boom. The quality of German products may be a more likely explanation for the strong international performance of Germany's export economy.)

Germany has in this way avoided outright economic crisis but it still has an economy that is performing far below its potential. The fact that Germany is in a better position compared to many European countries should not obscure the fact that it is achieving only a faction of what it could and should aspire to in terms of economic strength and standard of living.

Ultimately, the problem is a political and social one rather than an economic one. In order to perform better economically, domestic demand would have to be strengthened. In the short run this would mean increasing government spending and in the longer run it would require a substantial redistribution of incomes in favor of low incomes which would boost domestic demand. (Lower incomes tend to be spent completely while higher incomes are usually saved in part.)

This could be a path to stronger growth and also a way out of an export oriented growth model that is in large part responsible for the troubles of the Euro. However, income redistribution is as contentious in German politics as anywhere else. Instead of facing Germany's economic difficulties large parts of the German public prefer to ignore Germany's economic weaknesses and lecture the rest of the world about an imagined success story.

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