The German economy maintains the most valuable trade surplus in the world with a current account balance of approximately $300 billion – topping even manufacturing giant China. While globally valuable brands, advanced technology, and high-quality labor contribute to Germany’s success, the country also benefits from favorable government and Eurozone policies. The adoption of business-friendly labor laws, a currency valuation which encourages exports, and guarded fiscal policy all aid the country’s trade surplus. This article provides an overview of Germany’s fiscal, labor, and monetary policies which can serve as a blueprint for U.S. domestic policy reform or German and EU trade deal negotiations.
The Hartz reforms, a series of labor reforms enacted following years of disappointing growth, initiated changes to labor laws which included the reduction of benefits for long-term unemployment welfare recipients and created stricter regulations on employment opportunities which an unemployed person could reject. The reforms decreased job selectively among the unemployed and helped reduce unemployment. Lower selectivity and lessened unemployment benefits caused unemployed workers to switch industries and lose industry-specific skills. Skill loss raised the cost of displacement – the cost of becoming unemployed – by approximately ten percent. Downward pressure on wages with rising productivity increased competitiveness of German companies as their favorable labor costs allowed businesses to “do more for less.”
The reforms have increased German competitiveness in the short-term, but may hinder economic competitiveness in the long-run. The 21st century information economy demands high-skill workers and the German system has systematically decreased the skills of its labor force. Rather than depressing wages, America would be best served by implementing reform policies drawn from the Hartz reforms aimed at driving productivity and efficiency such as the creation of job centers and programs for skill training. Reforms directed at promoting entrepreneurship and small businesses should also be considered such as entrepreneurship grants, low-interest loans to encourage hiring, and tax incentives for self-employed individuals.
While Germany maintains the most robust economy in the European Union, sharing a currency with 18 weaker economies has resulted in currency undervalued as high as 30 percent relative to the theoretical strength of a stand-alone German currency. An undervalued Euro allows importers of German products from outside the Eurozone to purchase German products at a discount relative to use of the Deutschemark. This discount drives up German exports and competitiveness. Weaker currency, however, limits German purchasing power and sacrifices the lowered cost of living of a strong economy. Additionally, weak currency raises the costs of international travel which suppresses a country’s ability to conduct public diplomacy.
To respond to Germany’s currency undervaluation, the United States could negotiate with the European Union to create a mechanism that requires strong economies in the Union to stimulate weaker economies and minimize discrepancies between the Euro and theoretical national currencies. This mechanism would reduce the German competitive advantage from currency undervaluation – aiding American competitiveness – and increase consumer demand in Eurozone countries that lead the world in purchasing American products. Additionally, leveraging Germany’s low cost of debt through the European Central Bank to diversify weaker European economies will raise economic resiliency and better prepare the global economy to weather an economic downturn.
Germany’s Schwarze Null (black zero) fiscal philosophy has provided low debt and high fiscal space for economic stimulus. German politicians tout tight fiscal policy as preparation for economic downturn but ignore the economic resiliency that investing in the country’s infrastructure, healthcare, and education creates. Increasing economic growth and private consumption through funding public projects with positive financial return can improve economic security and raise productivity. Additionally, public expenditure increases Eurozone inflation and allows easier debt repayment for indebted Eurozone states to prepare them for economic downturns – lessening the potential burden on the German economy.
The United States should take a long view in preparations for economic downturn and leverage low cost of government funding towards increasing the competitiveness of American businesses and workers. Funding programs and projects that increase the health, skills, and efficiency of the labor pool increases productivity which makes the American labor more competitive and maintains competitiveness at higher wage levels. Investments targeted at increasing competitiveness will raise quality of life – attracting high-skill workers – and drive consumer spending and GDP growth. Internationally, negotiating reforms for Europe that require economies with current account surpluses to stimulate economies with current account deficits will lessen differences in Euro bloc economic strengths. A more unified Euro bloc economy reduces currency under- and overvaluation while increasing consumer demand in the leading importer of American products.