Eurozone’s New Concern: Too Few Reforms in Germany?

Written by | Sunday, March 2nd, 2014

Berlin has been recently more and more criticized for its lax stance towards reforms to boost competitiveness although Germany itself requires strict economic discipline from other eurozone countries. While battered Southern-European countries like Greece, Italy, and Portugal are making giant leaps in the fight for their competitiveness, Germany seems to stand still. The country is still drawing on the reforms it undertook about a decade ago but economists warn that their effect will not last forever. Yet, there is some logic on both sides.
While it is only natural that debt-hit eurozone economies which are in a full reform swing consider Berlin’s behaviour unfair, Germany’s decision to enjoy a bit of ‘luxury’ seems to be also legitimate. In fact, we all do like to reward ourselves after a good job is done – and Germany has been doing a good job. The country is generating surplus, its budget is stabilized, fiscal policy balanced, and international trade is flourishing. Moreover, even though experts warn that the positive effects of the ten-year-old reforms might disappear at some point, the timing depends on many variables such as labour costs, market prices, or exchange rates. Nobody dares to predict numerous constellations and scenarios of how indicators will evolve, and thus the timing of Germany’s running out of the “gas” can be just as vague as experts’ reasoning that it is about to happen.
In the meantime, Angela Merkel uses favourable economic conditions for building – perhaps a bit populist – support of the electorate. While many parts of Europe are trying to fight demographics by postponing retirement as far as voters can digest it, the plan of Merkel’s grand coalition is in fact to decrease the retirement age. This, just like her another idea to increase the pensions of selected groups of the retired, is not embraced by analysts. Andres Fuentes, an OECD expert on Germany said for the Wall Street Journal, that these policy proposals go absolutely against the developments of labour market trends and against needed changes.
German Minister of Finance, Wolfgang Schaeuble, replied to the censure saying that his country simply does not have problems like Greece, Spain, Ireland, or Portugal which “are doing what they have to do”. Nonetheless, Mr Schaeuble received a few pieces of advice from EU Commissioner Olli Rehn who suggested a couple of reforms of the German labour market. For instance, every second German woman works part-time only while only 70 percent of these women have children. Therefore, Commissioner Rehn recommends Germany to change the labour code in the way that would motivate more women to work full-time. Moreover, he said that Germany should allow for a steeper rise in wages in the economy in order to stimulate the economy by domestic demand.
It is an irony that the eurozone’s biggest economy is motivated to change the things that other countries would maybe even like to pay for. Central European economies, for instance, suffer from a shortage of part-time jobs or actually any other form of jobs rather than the full time option. Thus, mostly mothers who would like to work part-time and help their household budgets are put off by the labour market system in which you either work full-time or you do not. Now, Germany – the engine of the European economy – is criticized for these bits of luxuries for its middle class, which it, by the way, can afford.
What is then what critics are trying to push through? A selfless worry about the future of the German economy, which influences the economic destiny of the entire eurozone, or is it a form of jealousy that makes us want what most of EU countries cannot (yet) afford? Germany has likely been the most successful economy on the European continent since its recovery after the WWII. It could be likely foolish to assume that it would forsake its place in the world economy for a package of populist economic goodies if it really could not sustain them.

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