update: 14-02-2012           wildcat.zirkular.thekla.materials.english

Wildcat 90, summer 2011

The German Model (excerpt from article in Wildcat no.90)

Between the first 'oil crisis' and the second a combination of neo-mercantilism, strong currency and further segmentation of the working class developed in Germany, promoted by chancellor Schmidt's SPD (Social-Democratic) government as 'the German Model'. The Bundesbank reacted to the strong wage increases of the early 1970s with measures intended to slow economic growth. These measures focused one-sidedly on price stability and slowing down internal demand. The trade unions supported this export-oriented policy of increased productivity and 'modest wage rises'. Thus unit labour costs remained stable.

In social terms this 'German Model' worked by giving security to the core workforce while lowering the standards of the rest. From the Kohl government of the 1980s to the Green Party-SPD coalition of the 1990s this tendency became ever more pronounced: legal changes allowed the expansion of temporary work, companies were taxed less heavily, state spending and welfare services were reduced. During the current crisis the Merkel government and employers have driven this policy further.

Since crisis struck at the beginning of the 1990s the relation of power between the classes has shifted in general. Since1993 labour's share of total national income has decreased persistently, with the total volume of wages distributed more and more unevenly (widening 'wage differentiation'). Initially the decreasing proportion of income going to labour resulted from the increase in part-time work, but since 2003 actual hourly wages have decreased, mainly because of the expansion of so-called 'atypical employment relations' (temp work etc.). We can summarise this process neatly in one sentence: "Between 1998 and 2008 the number of people in 'atypical employment' increased by 2.4 million, while 'normal employment' decreased by 0.8 million jobs." (Logeay/Weiss). Current statistics state that 7.6 million workers are employed 'atypically', which is a quarter of the total workforce. On average the wages in temporary jobs and 'mini-jobs' are only half of the wages in 'normal employment relations'. This wage difference "remains even if studies take into account as explanatory factors the usual social, demographic and economical characteristics (type of profession, size of company, sector, age, gender, qualification, seniority, region)." (Logeay/Weiss)

The German export model

The adjustment pressure exerted by the EU on labour markets led to a 'race to the bottom' in terms of imposed labour 'flexibility', lowering of wages and expansion of 'atypical employment relations'. The working class lost ground everywhere, but the 'race' was won by Germany: here workers were squeezed the most. Between 1996 and 2006 the number of full-time jobs fell by 1.36 million; between 2000 and 2008 labour productivity increased by 35 per cent while wages grew by only half the wider EU rate.

There are three main reasons behind this. First the precondition: the sharp economic slowdown imposed by the Bundesbank in 1993 led to high unemployment in East Germany, creating an industrial reserve army. Second, the euro: the low interest rates attached to the new currency resulted in a boom in the peripheral European countries, which mainly benefited the bigger German corporations. At the same time the European Central Bank provided 'monetary stability' (a 'strong euro'), which also favoured German industry. German machine manufacturers need not boost sales through low and lower prices of their commodities (special machinery is not a 'cheap mass product'); if the currency is strong their employees can be cheaply provided with textiles and food from the world market; raw materials such as crude oil, paid for in US dollars, remain relatively cheap. Third, thanks to the industrial structure (export sector!) in Germany, it was easier to enforce the general drive to lower wages and standards. While wages within the export sector continued to rise, the low-wage sector was expanded rapidly.

The lowering of the wage level was accompanied by an economic policy fostering deregulation of the finance sector and significant tax relief for employers. Since the tax reform of the social-democratic regime of chancellor Schroeder, Germany has become a tax haven for capitalists. As early as 2005 company tax accounted for only 0.6 per cent of GDP, while the EU average was 2.4 per cent. After the corporate tax reform of 2008 the rate fell to less than 30 per cent, below those of Belgium, France, Italy and Malta. As a result of these two tax reforms the state has missed out on around 100 billion euros so far.

An OECD study of October 2008 briefly summarises the social consequences of these policies: "Since 2000 income disparity and poverty in Germany has increased more than in any OECD country. The increase between 2000 and 2005 exceeded the increase recorded during the preceding 15-year period (1985 to 2000)". The HartzIV reform (unemployment and social benefit reform), introduced on 1st of January 2005, did not initiate this development but consolidated and aggravated it. One of the main reasons the reform could be enforced politically was the export strategy and related class division described above; HartzIV fortified this division in turn.

HartzIV and a rapidly expanding low wage sector – by now employing nearly a quarter of all workers – have put further pressure on the general wage level (while the wage of permanent workers remained stable or increased slightly). In 2005 labour unit costs were lower than in 1995. During the period from 2000 to 2010 they increased by 6 per cent in Germany and by 20 per cent in the other euro countries. In the highly productive industrial sectors they only rose by 1 per cent, against 10 per cent in the wider eurozone.

The export sector was the main beneficiary of this these 'below average' wage developments. Today around a third of all working hours are performed in the export industry. The share of export goods in total GDP has more than doubled since 1993! German industry exports half of its total output. It is only in this export-oriented industry that wages increase at the pace of inflation and labour productivity. The average hourly wage is 33.10 euros (this includes all wage costs, such as employer's contribution to health insurance or pension funds) – which is the third highest wage in the EU. The competitive advantage of the German export economy is based on the extreme income gap between this type of industry and the service sector. The difference is about 20 per cent, which is way above the average in the rest of Europe. Industry has the advantage of being able to buy cheaper services. Thus industry benefits most from the low wage sector.

The German export strategy was an effective 'beggar-thy-neighbour' policy in relation to most of the other EU countries - on the basis that the latter were the first to plunder their workers. From the mid-1990s to 2008 of all EU countries Spain (3.8 per cent), Greece (3.9 per cent) and Ireland (6.8 per cent) grew the fastest. Portugal's GDP grew 2 per cent on average during the same period, which is faster than the German GDP growth (1.8 per cent). It was first of all due to these growing markets that the German managed to leave the stagnation of the 1990s behind. In 2007 German exports to Portugal, Ireland, Greece and Spain accounted for 17 per cent of the German export surplus; including Italy this rises to 27.5 per cent, with a total EU figure of 63.4 per cent. The persistent German trade surplus was matched by the trade deficit of the peripheral European countries. Their growth was not only attached to imports, it was also financed by credit. And not just the (imported) commodities but also the credit came mainly from German corporations and banks.

The intra-European European trade surplus was the precondition for the German export of capital to China. Geopolitically Germany positions itself between Eastern Europe (where a lot of manufacturing capacity has been relocated) and the attempt to replace the shrinking domestic market by exporting goods to the middle classes of the peripheral European countries. The advantage of 'German capital' is that – in contrast to Italy, France and Great Britain – the German industrial structure has remained stable, allowing relocation of some industrial activity to other countries while still cashing in on the productivity gains.

Class recomposition during the crisis

From May 2010 to May 2011 the DAX (German stock market index) grew by 53 per cent; this was certainly not fully backed up by the growth of the 'real economy', but it expressed the 'mood' prevailing in the German economy. For the rich, the employers and the banks, the course of the crisis so far has definitely been V-shaped (the net profit after tax of the 30 DAX corporations in 2010 was 63 billion euros, of which 25 billion was distributed in dividends). For the rest of population the crisis is L-shaped (more and more temp work, high price inflation for basic goods, financial crisis of the local state and its social services). Wage increases settled through collective agreements were 0.9 per cent on average in 2010, while official (!) inflation ran at 2 per cent.

Since the crisis of the early 1980s registered unemployment in Germany has always been above the 2 million mark (apart from the exceptional 'reunification boom' of 1990). Now official unemployment has fallen back below 3 million; this is partly the result of an increase in part-time and 'mini' jobs (the total labour volume distributed among more people) and partly because the criteria used for official unemployment statistics have been changed constantly, so that they now include only some of those actually unemployed: serious calculations give a figure of 5 million (the 'employment gap'). Arithmetically speaking there are ten unemployed for each vacancy ('official' jobs subject to social insurance contributions). Germany has the world's highest proportion of long-term unemployed: of the 3 million officially unemployed, 1.4 million have been unemployed for a year or longer.

During the course of the crisis since 2008 jobs have been cut in the industrial sector and created in the service sector. In part this reflects the shift from permanent jobs to temporary jobs: temp agencies are often statistically reported as part of the 'service sector' even if the actual work is in manufacturing. Temp work has increased heavily: in November 2010 around 900,000 people were employed as temp workers, a record figure in German history. A full-time temp worker earns 52 per cent of the average wage for full-time employment. Around 100,000 temp workers have to supplement their wages with HartzIV benefits . The number of people having to supplement their wages with social benefits has increased by 400,000 between 2005 and 2009 to about 1.3 million, of whom 390,000 work full-time.

Nevertheless it must be said that during the crisis the core of the 'German Model' – the close collaboration between capital, trade unions and state in support of the export economy – has even been strengthened. In 2009 around 1.5 million (permanent) workers were put on Kurzarbeit ('short-work': reduced hours or temporary redundancy with the state partially covering the lost wages) and around 1.2 million jobs were saved through general reduction of working time. Those actually sacked were the temp workers. Chancellor Merkel not only sought to protect Opel workers (personally offering support when Opel's parent company General Motors announced job cuts), she also opposed the European Commission in its attempt to 'liberate' the Volkswagen corporation from state and trade union influence. The state shareholding in Volkswagen blocked Porsche's strategy of using cash-flow from Volkswagen itself to finance a takeover of VW. (Porsche is a rather small automobile company, but its substantial stock market profits might have allowed it to swallow the 'giant' VW). Instead Porsche was taken over by VW and the VW works council kept its strong position (VW and the VW works council are the symbol of German 'social partnership' and of technocratic collaboration with the state). Since the end of 2009 VW has boomed: the collaboration seems to have paid off. More broadly, since the economic recovery the core workforce (for example at Siemens) has been rewarded with extra payments for loyalty, while temp workers and workers in the non-export sectors miss out and welfare benefits are further cut.

But it was not just Kurzarbeit that divided the working class into those 'whose job is saved' on one hand and (sacked) temp workers and unemployed on the other; the division was also proclaimed in the assurance by Merkel and finance minister Steinbrueck in October 2008 that all savings accounts would be guaranteed by the state; this helped all those who 'have saved something', while HartzIV claimants are not even allowed to save money (there is an upper limit on savings for benefit claimants). The 'scrappage-bonus' (extra money for those who own a car and who are able to buy a new one) had a similar political dimension. The fact that this class division actually works well in political terms depends on the prior success of the export strategy.

The boom in Germany

In 2010 the global economy grew by about 5 per cent in real terms and German GDP by about 3.6 per cent. In summer 2011 German GDP growth will reach the pre-crisis level again, but in this 'recovery' the government and employers have had more "luck than system" Though their economic stimulus package of 60 billion euros was socially very effective (short-time work, pampering the small trading companies (small construction companies etc.), 'scrappage-bonus'), quantitatively it was much less significant compared with the economic stimulus programs of the US and above all China, which spent 7 and 14 per cent of GDP respectively (Germany spent only 2.5 per cent). It was the state-run economic programmes that helped Germany to recover. Current studies show that the US is de-industrialised to such an extent that the 'cheap money' spent by the US state for economic recovery actually flows out of the country. Even more than the US programme it was the Chinese stimulus policy that benefited the German economy: in 2010 German exports to China grew by 40 per cent, despite the fact that exports hardly declined during the previous (two) years of crisis. The boom of the German automobile industry almost exclusively depended on the BRIC states (Brazil, Russia, India, China), and again mainly on China, while in Europe car sales declined by 5.1 per cent.

The economic upturn in Germany is solely based on exports, while internal demand is sluggish. The boom is not 'self-sustained'. According to preliminary data from the Federal Statistics Office the annual growth rate of 3.5 per cent in 2010 can be broken down as follows: external trade contributed 1.1 per cent, the inventory cycle (goods stockpiled and have not yet on the market) 0.8 per cent, state consumption 0.4 per cent, capital investment and private consumption only 0.3 per cent respectively. The inventory cycle and exports accounted for more than half of the growth – but you can only fill your storage once, and according to the calculations of international banks external trade will generate only a small amount of growth in future.

In 2010 71 per cent of German exports went to the EU, 40 per cent to the eurozone. Exports to non-European markets increased by 26 per cent, while those to the debt-ridden euro members grew only by 12.7 per cent against 2009. In March 2011 German exports beat all records, reaching a volume of nearly 100 billion euros, the highest level since the beginning of statistical records in 1950. In April 2011 this declined to a considerably lower level of 84.3 billion. By now the volume of orders in key branches is generally and perceptibly declining.

Translator's note: for a short report written by someone who worked in what was probably a very typical 'German Model' machine manufacturing company on the outskirts of Berlin, see: prol-position"

[german version]

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