The term “Modell Deutschland” was coined by the Social Democratic party for the 1976 election campaign: Germany as a model economy. Europe and the US had endured a recession in 1974-75 that had a whiff of the deeper recession that would come in the early 80s — stagflation, an oil shock, and high unemployment. In Germany, however, Helmut Schmidt’s Social Democratic party managed to handle the recession with aplomb. Germany fared well, and in fact the Social Democrats expanded worker co-determination (giving workers a say in how companies are run, and seats on the boards of directors).
Based on this New York Times piece, the phrase still fits, this time with Angela Merkel’s Christian Democratic party. Germany’s success so far in handling the recession even while paying the lions’ share of bailouts for Greece and Ireland is the envy of the industrialized world. While Germans themselves grumble about the difficulties of the Euro and trying to keep the economy going during a global depression, they’ve managed to keep growth going and out perform most other countries.
Chancellor Angela Merkel (CDU – the right of center Christian Democratic Party) was in a “grand coalition” with the left-of-center Social Democrats when the crisis hit in 2008. Together the two parties passed a balanced budget act, requiring the Bundestag and German Länder (states) to limit budget deficits to .35% of GDP by 2016 and to have them balanced by 2020. There are exceptions in the case of national disasters and emergencies, but the point was clear: there is German consensus that debt has to remain under control.
Most economists are uncomfortable when debt to GDP ratios rise above 60%. By that point increasing the debt does little to stimulate the economy (and actually becomes counter-productive when you get to about 100% of GDP) and creates long term damage. After getting budgets under control by 2007, the recession pushed them back up over 70% of GDP. Given that 60% is the proscribed (but ignored) Eurozone limit, the high debt level was embarrassing. The Germans wanted to send a clear message that this was short term, with both the left and the right united in vowing to cut debt moving forward.
President Obama urged the Germans to pass a stimulus in 2009 to help get the European economy going. Merkel, a physicist by profession, simply could not see the logic in Obama’s view. While the US with the dollar as a global reserve currency and massive economic clout might be able to get away with debt to GDP ratios nearing 100% (though she had her doubts on that too), it would be reckless for Germany to take that approach. Instead, after securing re-election and joining the FDP in a new center-right coalition, her government passed an austerity program at home, even as it had to pay to help the Greeks and Irish. Merkel was hesitant to help (her hesitancy was criticized as making the situation worse), but it’s hard to tell your own citizens to take cuts while paying for countries that had little economic discipline.
Merkel’s program was what Obama would call balanced — revenue increases and spending cuts. However, the Germans did things differently than the Americans. First, they weren’t driven by ideology. You didn’t have people condemning government “as the problem” and trying to blame either the right or the left for the situation, making it a political football. They approached it rationally.
There is a recession. The debt is too high. Our demographics show our population is aging. It is a part of Germany’s moral and ethical character to have a stable social welfare system that guarantees health care, helps the unemployed and assures that the elderly do not suffer. It is essential for Germany to educate its children well in order to compete in the future. How can we make reforms that allow us to adapt to the recession, cut debt, but not endanger our population and our social welfare system?
The answer, of course, was to look at their spending and determine where there were inefficiencies, what areas could be cut, and to set priorities. Yes, a modern industrialized state without a quality social welfare system may be barbaric, but you can’t allow social welfare programs to remove incentives to work, to cost more than the people can afford, and undercut rather than support social solidarity. Of course, cuts aren’t all it takes – when you’ve got debt, you also have to increase revenue, so taxes had to go up. This also was done pragmatically — rather than just a “tax the rich” vs. “taxes or evil” debate, they had to figure out how to raise revenues in ways that didn’t hurt the economy or create inequities.
Tax increases are a less harmful way of reducing debt than spending cuts. Spending cuts slow the economy more than a tax increase. But too many taxes alongside wasteful spending creates a lose-lose situation. These are not decisions for ideologues or political pontificators, they are decisions to be reached with a cool rational eye on the facts.
To be sure, Germany has advantages. It does not have the gap between the rich and the poor that the US has. While America’s middle class has had stagnant wages the last thirty years, all Germans have seen consistent income growth. While the gap between the rich and and poor has been growing here, that hasn’t happened in Germany. There are still people who are very rich, and there are poor people — and there are incentives to innovate, produce and invest. But the power hasn’t shifted completely to the wealthy elite. Strong labor unions especially assure that more equitable relations are maintained — business and labor have more a partnership than separate classes. Germany proves that those who hate or demonize labor unions are misguided.
Germany also avoided the housing bubble, even if many of its banks invested in dubious CDOs. Germany’s financial and economic sectors are heavily regulated, and therefore resist the kind of wild fiascos that engulfed Ireland, the US, Iceland, Spain and all the others who believed the 1990s myth that de-regulation was good and the ‘market gets it right.’ A good strong regulatory regime has helped Germany stay afloat.
Finally, Germany didn’t let it’s industrial sector die off in the last recession like the US did. While the US went towards service industry and financials — producing less and consuming more through debt — Germany maintained a current account surplus (consumed less than it produced), and supported its industrial base. That means that Germany lacks the huge imbalance the US suffers; the US has been living beyond its means, for the most part the Germans have not.
Germany has challenges — if you talk to Germans they’ll be vociferous in the need to still reform the health system, concern about the Euro, worries about high subsidies to industries, etc. There are ideological differences between the left and right, though not usually pitched in the emotional ‘good vs. evil’ way of American politics. There are vast differences between the US and Germany, and the US does do many things better. Still, given the situation, there’s a lot we can learn from “model Germany.”