Is the German Model all it’s Cracked up to Be?

As an economic model Germany has no shortage of fans. It has enjoyed sustained success and has navigated through the choppy global downturn much more smoothly than most. But is this admiration justified?  For social democrats, less than in the past.

Since the millennium, median real wages have stagnated and inequality soared, largely the product of the way the economy has been nudged gently in the direction of a more market model. The chart below shows how, following the steady liberalisation of labour markets, inequality has risen much more sharply in Germany than across the OECD. As a result, the proportion in poverty has risen from 6.5% in the mid-1990s to 11% in 2010, while real earnings for the low-paid have fallen around a tenth since 2000.

As in the UK and the United States, the big winners from the past decade have been business and top earners. The share of GDP taken in wages has fallen while the share accruing to owners of capital has risen sharply. Wage-earners – especially those on low pay – have been the big losers, while the proportion of workers covered by collective bargaining, once one of the highest in the club of rich nations, has fallen by about 15 per cent since 2000 and now stands at about 60%. Germany may still be the spiritual home of stakeholder capitalism, but today trade unionists are almost outnumbered by shareholders.

Because of these trends and because Germany has no national minimum wage, the nation’s economy is now dependent on a growing class of low-paid workers. The chart below – from Fabian Lindner at the IMK Macro-Economic Policy Institute in Duesseldorf – shows that almost 11% earn less than 7 euros an hour, around the level of the national minimum wage in the UK. In large parts of the service sector, monthly wages – before tax – hover around 650 euros a month.

None of this is accidental. It is part of a wider economic strategy geared primarily to maintaining export competitiveness while preventing employers moving production abroad. As a result, economic growth is remarkably now more dependent on net exports than consumption demand. Germany accounts for 9% of world exports with 2% of the population, while the its export:GDP ratio has been edging closer to a towering 50%.

This may have helped sustain the German economy, but it has come at a heavy price. The first group of losers are a rising group of workers forced to work on pay too low to deliver an acceptable living standard. The second group is large parts of the rest of Europe. Germany – which already has a huge built-in advantage of an artificially low currency from membership of the euro – has been engineering a further competitive devaluation by lowering its wages in comparison with its neighbours. This is adding to the pressure on other much less competitive and beleaguered economies.

Germany has undoubted strengths. But its economic strategy is forcing a bigger correction elsewhere than is needed. It does not need to lower wages to maintain its international advantage and in doing so is imposing high costs on those who can least afford it. When all nations are being asked to share the pain of the global recession by rebalancing their economies, it is time Germany took a bigger hit itself.



  1. Tijl says

    This article makes no sense. It actually says competitive wages are a problem? WTF? Free markets make strong economies, this is the evidence. China and Germany are doing well because production is high, export is high, and workers aren't overpaid like in many Western countries.

    It's simply amazing that while almost every country has followed keynesian, big government principles and failed, while the countries that lean more towards free market principles, Austrian economics are doing fine, that this guy actually critiques the better students of the class while defending the bad ones.

    Germany should keep doing what it's doing, and if other countries want to survive, they will need more competitive wages, less bureaucracy, and more efficiency.