Head of Economic Research Ryan Bourne authored an article for The Spectator's Coffee House section on lessons from Germany's economic awakening over the last ten years.
The Eurozone crisis is teaching us plenty about how to recover from recessions. The nations that tried a debt-fuelled stimulus have found that their economies haven’t grown much, but they are saddled with the extra debt. The Swedes have cut taxes for the low paid, the Estonians took the fast route back to fiscal sanity — and both are now growing well, in spite of the turmoil that has engulfed their neighbours. But what’s less well-known is Germany’s record of reform, and how it has helped the country reach unemployment at a 20-year low.
Ten years ago, the German economy itself was pretty stagnant. When it first entered the euro, its low inflation meant that it faced the highest real interest rates in Europe. This stifled growth, increased social expenditure and hit tax revenues. It couldn’t play with interest rates anymore, as a Euro member, so it had no choice but to embark on structural economic reform. The aim was to improve competitiveness and labour market flexibility, to try to realise its great traditional strengths in technology and manufacturing.
Wage restraint was part of the solution, but so were tax cuts. Between 2000 and 2005, Germany cut corporation tax, and capital income tax. It relaxed employment protection by deregulating temporary and part-time employment, and drastically reduced benefits to the long-term unemployed to coax them back to the workplace. The Hartz reform packages, together with the controversial ‘Agenda 2010’, meant encouraging jobseekers to take low paid jobs. Dole conditions were tightened, and long-term training and direct job creation measures were cut back in favour of shorter programmes aimed to accelerate reintegration into the labour market.
There were simpler tax rates for the low-paid, supplemented by reforms to the existing labour market. For example, in 2004 small businesses with fewer than ten employees were made exempt from dismissal protection for employees. (This, by the way, is precisely what is being resisted in the UK following Beecroft’s recommendation).
Yes, it hurt. Yes, it worked. The benefits of these controversial changes can be seen in Germany’s recovery and strong export performance from 2005 onwards. It entered the crisis in comparatively good shape, and employment has recovered much more quickly since the crisis than in most other EU countries (helped, of course, of course, by an undervalued currency). While Germany was cutting regulation and employment laws, Gordon Brown was doing the exact opposite in Britain."
To read the full article, visit The Spectator Coffee House at this link.