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From Sick Man of Europe to Economic Superstar
Publication date: Feb 05, 2014 12:41 PM
Start: Feb 05, 2014 12:00 AM
New research suggests that economic policy
played no essential role in the dramatic resurgence of Germany’s
economy, with important lessons for Europe.
Prof Christian Dustmann et.al.
the late 1990s and into the early 2000s, Germany was often called “the
sick man of Europe”. Today, after the Great Recession, Germany is
described as an “economic superstar”. Germany’s number of total
unemployed fell from 5 million in 2005 to about 3 million in 2008, and
its unemployment rate had declined to 7.7 percent in 2010. Germany’s
exports reached an all-time record of $1.7 trillion in 2011, which is
roughly equal to half of Germany’s GDP, or 7.7 percent of world
How did Germany, with the
fourth-largest GDP in the world (after the United States, China, and
Japan) transform itself from “the sick man of Europe” to an “economic
superstar” in less than a decade? In a recent paper published in the
Journal of Economic Perspectives (Dustmann, Fitzenberger, Schönberg and
Spitz Oehner, 2014; also available as CReAM Discussion Paper No. 06/14), we argue that:
- The astonishing transformation of the German economy is due to an unprecedented process of decentralization of wage bargaining that led to a dramatic decline in unit labor costs and ultimately to an increase in competitiveness of the German economy.
- The process of wage decentralization was made possible by the specific governance structure and autonomy of the German labour market institutions, not rooted in legislation, but laid out in contracts and mutual agreements between employer associations, work councils, and trade unions. In times of challenging economic circumstances, Germany’s labor market institutions thus proved far more flexible than previously thought.
- The “Hartz” reforms (2002-2005) played no essential role in improving the competitiveness of German industry, as the process of decentralization of wage bargaining started in the mid-1990’s, nearly a decade before.
The findings provide a new
view on the role of policy in the dramatic resurgence of Germany’s
economy. The authors don’t believe that the political process alone—had
the autonomy of wage bargaining not existed—would have been able to
achieve a similar degree of wage decentralization in Germany, which
ultimately led to the significant improvement in competitiveness that we
The research has important consequences for what Europe’s ailing Southern European countries can learn from the German experience. Other countries, such as Italy and France, have far more centralized and legally anchored labour market institutions than Germany, and reform will have to rely more on the political process. Whether similarly radical changes can be achieved in these countries remains therefore an open question, so the authors conclude.
The German experience does therefore not
provide support for recommending the type of political reforms Germany
implemented in 2003 (the “Hartz” reforms). Rather, Germany’s experience
focuses attention on reforms that target the system of industrial
relations by decentralizing bargaining to the firm level while keeping
workers representatives involved.
- Christian Dustmann, Professor of Economics and Director of CReAM, the Centre for Research and Analysis of Migration at UCL.
- Uta Schönberg, Reader (Associate Professor), UCL Economics
- Professor Bernd Fitzenberger, University of Freiburg
- Professor Alexandra Spitz-Oener. Humboldt University
Dustmann, C., Fitzenberger, B., Schönberg, U., Spitz-Oener, A. (2014): From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy. Journal of Economic Perspectives 28(1), pp. 167-188; also available as CReAM Discussion Paper No. 06/14.