The German Economy
A structural account of the social market model and its rigidities.
Summary
Horst Siebert, who ran the Kiel Institute for the World Economy and served on the German Council of Economic Experts, wrote this assessment of the German economy at a point when the country was called the sick man of Europe.
His diagnosis focuses on institutional rigidity. He examines the labour market, where employment protection, collective bargaining coverage and the interaction of unemployment benefits with wage floors produced persistent unemployment; the social insurance system, funded through payroll contributions that raise the cost of employment; the tax system; the effects of reunification, including the decision to convert East German marks at parity and to extend West German wage bargaining eastward, which he argues destroyed eastern competitiveness; the ageing population and the pension system; and the constraints of euro membership, which removed exchange rate adjustment.
Siebert writes from a market-oriented position within German economics and his recommendations are for labour market flexibility, benefit reform and reduced non-wage labour costs. The book appeared in 2005, as the Hartz reforms were being implemented, and Germany's subsequent recovery is generally attributed partly to those reforms and partly to wage restraint, euro membership and Chinese demand. Wolfgang Munchau's Kaput argues that the recovery rested on foundations that have since collapsed. Siebert's institutional analysis remains a good description of how the German system works.
Key takeaways 7
- German unemployment persisted because employment protection, benefit levels and wage floors interacted to price low-skilled workers out of jobs.
- Social insurance funded through payroll contributions raises the cost of employment directly and discourages hiring.
- Converting East German marks at parity and extending West German wage bargaining eastward destroyed eastern competitiveness.
- Euro membership removed exchange rate adjustment, which transferred the entire burden of competitiveness correction to wages and prices.
- Siebert argues that German institutional rigidity, not any lack of productivity or capital, explained the country's stagnation.
- Demographic ageing makes a pay-as-you-go pension system unsustainable regardless of any other reform.
- Collective bargaining coverage in Germany extends contracts to firms that did not negotiate them, which limits wage flexibility.
Who should read it
Investors and analysts of the German economy who want the institutional diagnosis made immediately before the reforms and the recovery.
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