O Frau Merkel, How Does Your Garden Grow? - Pacific Standard

O Frau Merkel, How Does Your Garden Grow?

A cheap euro, plus the "short work" plan, allowed the Germans to make lemonade from lemons. But tomorrow may be sour.
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Last week the German government reported a growth figure that should be the envy of the Western world, as long as most of the West struggles with mountains of debt while its citizens remain underemployed.

The number itself is boring, 2.2 percent. It's the amount the German GDP grew in the second quarter of 2010, compared to the same quarter in 2009. That's a record in Germany over the past 20 years — since reunification in 1990. If all four quarters were to expand at the same rate this year, Germany would be headed for an annual growth of something near 9 percent.

Germany managed this trick without shedding as many jobs as the United States in the wake of the 2008 credit crisis. Angela Merkel's government has been accused of shocking financial markets, mismanaging the euro and irresponsibly trimming its budget (with austerity measures) while America splashed out on bailouts and stimulus. Somehow, though, Berlin has done a few things right.

What?

The first obvious boost was a quick drop in the euro's value. Germans run their economy on highly engineered exports, and a cheaper euro has moved German cars and machine parts around the world. Some people have wondered whether Merkel's surprise announcement of a new fiscal regulation last May was bureaucratic boneheadedness or a deliberate ploy to keep the euro cheap, but David Marsh, author of The Euro: The Politics of the New Global Currency, doubts it was deliberate. "I think that's a conspiracy theory. I think that's going a bit too far," he said. "But obviously it's true that the Germans have profited enormously from a weak euro."

What Berlin did on purpose was a combined right-left punch of stimulus and job-preservation. The stimulus plan will be familiar to Americans because it was an Abwrackprämie, or "scrapping bonus," paid to German drivers for turning in their old cars for new (to boost Germany's all-important car industry) — which became a model for Obama's "Cash for Clunkers" program.

EUROPEAN DISPATCHMichael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

EUROPEAN DISPATCH
Michael Scott Moore complements his standing feature in Miller-McCune magazine with frequent posts on the policy challenges and solutions popping up on the other side of the pond.

The other measure was uniquely German. A Kurzarbeit, or "short-work" plan, encouraged companies to reduce workers' hours during the recession without cutting jobs. Under this measure the government paid workers a chunk of their salaries (between two-thirds and 90 percent) for days of the week when they did nothing. The companies saved the difference; the government picked up the slack.

What also helped was a controversial reform under former Chancellor Gerhard Schröder (which probably cost him his job) to reduce welfare benefits overall. This austerity from a few years back helped the famously rigid German job market grow more adaptable. It now has "flexible labor schemes that allow [companies] to breathe with the economy," according to Jörg Krämer, a chief economist at Commerzbank AG in Frankfurt.

And the results are astonishing. While unemployment rose in the United States to 10.1 percent in 2009, it fell in Germany to 7 percent. Now more Germans have jobs as well as extra money to spend, which could set the stage (in such a frugal nation) for an even broader recovery.

The hitch is that a worldwide recovery won't be as dramatic for Germans as it could be for Americans. German jobs, in other words, won't come zooming back. The Organization for Economic Cooperation and Development has predicted that Germany will have a "jobless recovery," but that's because the jobs have largely recovered. Germans are working less, without being poor or unemployed.

They could be in trouble a few years down the road, because by preserving jobs, the government has also kept the economy from changing (painfully) in whichever direction it needs to move. Skilled machinists for BMW have kept their jobs, but there's no guarantee that BMW will build quite so many gasoline-powered cars in a green-minded future. (Detroit also failed to retool for a new generation of cars, in part because of the Cash for Clunkers program.)

Still, Berlin gambled well. Compensation schemes like Kurzarbeit are too expensive to keep in place for years on end, so Germany needed some sort of upswing this year to make its plan work.

"If the economy does not pick up steam, it will catch up with us," Burkhard Schwenker, CEO of the management consulting firm Roland Berger Strategy Consultants, told Spiegel Online at the end of last year. "But if the economy does recover, Germany, as an export-oriented country with strong companies, will benefit in particular."

In that sense the euro crisis was an unexpected boon.

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