Hartz IV for Everyone

German Export Steamroller

The excessive German orientation on exports and the low-wage policy, on which it is based, have, over the years, repeatedly come under criticism from abroad. They have significantly contributed to the escalation of the Euro crisis. The policy of massive wage shrinkage during the SPD-Green coalition and the ensuing CDU-SPD grand coalition governments has allowed the German government to accumulate significant competitive advantages in relationship to other Euro zone countries. In fact, in the period from 2000 to 2008, real wages in Germany shrank by 0.8 percent - a record EU drop. During that same period, real wages rose in France by 9.6 percent and even by 26.1 percent in Great Britain. The wage restraint gave German industry the capacity to overcome its rivals and expand its exports, particularly to countries within the Euro zone, which has led - particularly in southern European countries - to comprehensive trade balance deficits and eventually plunged them into debt. At the beginning of the Euro crisis, the causes were frankly expressed in the German business press. It was analyzed in January 2010 that "because [Germany's] army of employees are satisfied with restricted growth in wages, the export steamroller is barreling over its European competition." Earlier the countries concerned would have been able to use devaluation to defend themselves, now there is "no defense against attacks with sinking unit labor costs and progress in productivity (...) within the common monetary realm."[1]

Overwhelming Surpluses

The dramatic rise in German exports, accompanied by a simultaneous drop in demand for imports, can still be observed in relations with France. In 1999, France enjoyed a foreign trade surplus of 39 billion Euros. In 2010, it was suffering a deficit of 51 billion Euros, which has continued to rise. By 2010, more than half of France's deficits (30 billion Euros) had been caused by Germany. In 2012, German exports to France had surpassed French exports to Germany by 40 billion Euros. The German export "steamroller" was continuing to crush the French economy; and because the German export offensive was not only having an effect on France, but also other EU countries, the EU Commission has now begun taking measures for their protection. With its growth in exports, since 2007, Germany has been overstepping the hardly tolerable reference level of six percent of the economic performance and will continue to do so at least for the next two years, complains Olli Rehn, EU Commissioner for Economic and Monetary Affairs. To not jeopardize the EU's economic development, Berlin must take counter measures and at least appreciably raise its real wage level.[2]

New Export Targets

Since some time, similar protests have been coming from outside of Europe. This is due to the fact that since the Euro crisis, the flow of German trade has clearly changed destinations. Berlin's austerity dictates are forcing the Southern European crisis countries to economize. This also affects their imports from Germany, which have not only stopped growing, but are even clearly receding. For example, German deliveries to Italy have diminished from 58.5 billion (in 2010) to 56 billion Euros (in 2012), to Spain from about 34.5 billion (2010) to 31 billion Euros (2012). Germany did not react like China, when confronted with a similar situation - by raising the domestic demand, to compensate for the decline in exports - but rather by expanding the exports to other countries. They should buy German products, to compensate for the southern Euro zone growing weaker. Therefore, German exports to the United States have grown from 65.5 billion (2010) to nearly 87 billion Euros (2012); since Germany has imported slightly more in 2012 than it had in 2010, the US foreign trade deficit vis à vis Germany has grown from 20.5 billion (2010) to more than 36 billion Euros (2012). Numerous other countries, ranging from Turkey to Mexico to Australia, whose purchasing in Germany have greatly exceeded their sales to Germany, have created a German foreign trade surplus of around 200 billion Euros - more than any other country. This threatens eventually to drive also these countries into debt, as it had done with Southern Europe.

Taking away Jobs

Non-European nations, as well as international institutions have begun pushing for restrictions being placed on German export surpluses. Recently the US Secretary of Finance warned that Berlin's export offensives threaten to not only drive the Euro zone deeper into the crisis but also the global economy. US commentators are also expressing sharp criticism. "Five years after the fall of Lehman, the world economy is still depressed, suffering from a persistent shortage of demand," wrote the economist and Nobel Prize for Economics laureate, Paul Krugman. "A country" (referring to Germany) "that runs a trade surplus is, to use the old phrase, beggaring its neighbors. It’s diverting spending away from their goods and services to its own, and thereby taking away jobs."[3] Krugman points out that Germany can particularly rely on a supplementary advantage - the Euro: because it is much weaker than a German national currency would be, it provides German enterprises a special advantage.

Berlin Remains Stubborn

Last week, the International Monetary Fund (IMF) demanded that Berlin make a change of course. According to reports, during his visit in the German Ministry of Finances, the IMF's Special Advisor to the Managing Director, David Lipton, demanded that Germany, at long last, reduce its foreign trade surpluses, in addition, he called on the German government to determine an upper limit, not to be surpassed.[4] Berlin strictly refused. It is out of the question to stimulate demand in Germany with an increase in wages. On the contrary, the countries suffering under the German export offensive should undertake "structural adjustments," meaning cuts in wages and social services, along the lines of the notorious German "Hartz reforms."[5] The disputes will escalate; the EU Commission may even officially reprimand Germany this week. It is not expected that Germany will give in. Low wages and excessive exports are flushing huge profits into the coffers of German companies, facilitating further expansion. Though this threatens to plunge numerous countries - and eventually even the global economy - into a severe crisis, it is, nevertheless, increasing German wealth and German power; a good reason for Berlin to continue on its current course.

[1] Der wahre Teuro; WirtschaftsWoche 18.01.2010. See also The End of Sovereignty (II)
[2] EU beargwöhnt Deutschlands Exportstärke; Frankfurter Allgemeine Zeitung 06.11.2013
[3] Paul Krugman: Those Depressing Germans; www.nytimes.com 03.11.2013
[4] Export-Streit: IWF drängt Deutschland zur Bescheidenheit; www.spiegel.de 04.11.2013
[5] see, for example: en.wikipedia.org/wiki/Hartz_concept