Workers Made Germany Into the World’s Best Economy

Source: Noah Smith, Bloomberg View, April 18, 2017

Let’s hope U.S. policy makers have woken up to the fact that the country is in a period of sclerosis, where its economic institutions seem to be inefficient along a variety of fronts. When things aren’t working, one good idea is to look around and see which countries are doing better. Right now, Japan is one such country. But in many ways, Germany looks like the most successful economy in the developed world….

….What is Germany doing right? The country has a very large state sector, generous welfare spending and a trade unionization rate almost twice that of the U.S. Though the country did undertake a few free-market reforms in the early 2000s, there has been no major wave of deregulatory mania. Nor did Germany escape the 2008 financial crisis or the Great Recession, both of which hit it hard. In fact, political and financial instability in the European Union probably was a drag on the country.

A new article by economists Christian Dustmann, Bernd Fitzenberger, Uta Schönberg and Alexandra Spitz-Oener proposes a theory for the German revival. Essentially, they say, it’s all about exports and unions…..
Related:
From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy
Source: Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, Alexandra Spitz-Oener, Journal of Economic Perspectives, vol. 28, no. 1, Winter 2014

From the abstract:
In the late 1990s and into the early 2000s, Germany was often called “the sick man of Europe.” Indeed, Germany’s economic growth averaged only about 1.2 percent per year from 1998 to 2005, including a recession in 2003, and unemployment rates rose from 9.2 percent in 1998 to 11.1 percent in 2005. Today, after the Great Recession, Germany is described as an “economic superstar.” In contrast to most of its European neighbors and the United States, Germany experienced almost no increase in unemployment during the Great Recession, despite a sharp decline in GDP in 2008 and 2009. Germany’s exports reached an all-time record of $1.738 trillion in 2011, which is roughly equal to half of Germany’s GDP, or 7.7 percent of world exports. Even the euro crisis seems not to have been able to stop Germany’s strengthening economy and employment. How did Germany, with the fourth-largest GDP in the world transform itself from “the sick man of Europe” to an “economic superstar” in less than a decade? We present evidence that the specific governance structure of the German labor market institutions allowed them to react flexibly in a time of extraordinary economic circumstances, and that this distinctive characteristic of its labor market institutions has been the main reason for Germany’s economic success over the last decade.