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Tuesday, January 23, 2018
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Germany and the Dynamics of European Economic Integration
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Germany and the Dynamics of European Economic Integration

70 pages · 7.93 EUR
(July 2008)

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Germany was a founding member of the EU. Along with France, West Germany played a critical role in subsequent economic developments. The seems to have ominous overtones. The Bundesbank has had a profound effect on developments in both monetary and fiscal policies. However, the SGP was a badly misjudged policy development. Germany’s high contribution to the EU’s budget is partly a problem of its own making: with increasing domestic prosperity, the excesses of the CAP, with zealous French support, were condoned. In consequence, consumers/taxpayers throughout the EU paid unnecessarily higher food prices/taxes. Although Germany’s social policy measures up well when judged by EU criteria, further reform is inevitable. The absence of an active German market for corporate control, along with the shorter run restrictions on labour mobility, contribute to the imperfect functioning of the EU’s single market. On the other hand, ECJ rulings have obliged Germany to abolish traditional regulations. The editor of this volume correctly observed in a draft paper, later published in greater depth (Funk 2005, 6; in Hölscher 2007, 180) that there is a series of megatrends affecting all west European labour markets:

"globalisation, service-sector growth, the revolution in information technology, destandardisation and the individualisation of employment contracts, particularly at a time when there has been a growth in company bargaining, as well as an ageing society and workforce…

The present writer would add that Anglo-Saxon capitalism and the socialmarket economies in Europe have also to come to terms with the exponential growth of China and India, and the uncertainties caused by the 2007 subprime crisis. In spite of their seemingly intractable nature, a critique of US/EU support of agriculture and the aerospace industry also seems germane. The neo-liberal response would consist of relying on an independent central bank to maintain price stability, along with the introduction by policy makers of structural adjustments, primarily designed to create ‘more flexible’ labour markets. In Germany, the Keynesians identify weak domestic consumption as a major cause of unemployment – not that modern Keynesianism relies solely on crude aggregate demand management. Although bereft of a policy prescription, Marx’s dynamics of capitalism would predict that a far higher surplus value could be expropriated outside of the Anglo-Saxon and the EU social economies.

Centralised bargaining that once served the German labour market well, Funk continued, is no longer able to act as an efficient allocator, although we were correctly warned against accepting the hypotheses of the neo-liberal commentators who see this system as being the exclusive cause of market in efficiencies. In any case, the system is in decline, particularly in east Germany, while some remaining features are unlikely to be discarded by the parties. Moreover, centralised bargaining should continue to set minimum standards, although the scope of statutory intervention may also increase (present writer’s emphasis). At the same time, the importance of company and plant bargaining will inevitably grow. Such critical variables as working time and training are best determined at this level. Another response to the megatrends will be an increase in non-standard employment contracts, although this will not signal the end of normal contracts of employment. This will nonetheless result in a higher degree of employment instability and poverty. Increasing employment rates among the over-55s is also of major importance in Germany, where barely a half of this age group has a job. In other words, there is no direct reference to the wholesale removal of constraints on recruitment and, more so, dismissal – a form of ‘flexibility’ that is in any case legally impossible to implement in the EU. (In Germany, there are added constitutional constraints). Yet following the tortuous and protracted implementation of Harz IV, economic adviser Franz enunciated further necessary conditions for employment creation, including ‘the simplification of labour law’. Two further conditions were a reduction in corporate taxation and social-insurance contributions, along with a moderation in (money?) wage growth. But corporate taxation has fallen secularly; indeed, the opposition candidate in 2002 Federal election observed that at that juncture many large companies were not paying any tax. Nonetheless, further proposed cuts in corporate taxation enjoyed wide support among policy makers, even at a time when Germany was breaching the EU’s Stability Pact. Not surprisingly, therefore, policy makers disagree on the expenditure cuts necessary to finance further cuts in corporate taxation. However, the medium and small business sector has major problems. Historically, it has not been subject to corporate tax laws, and its chief capital market (the public-sector banks) has been required by the EU to refinance its loans in the absence of state liquidity guarantees. Both these factors increase the sector’s costs. In addition, many heirs of Mittelstand entrepreneurs are reluctant to assume the onerous responsibilities involved in running these vitally important small and medium enterprises. Again, most policy makers agree that fiscal incentives are required – this time in inheritance taxation. A loss of control by resorting to equity finance is another possibility. Foreign takeovers with, in this sector, probable adverse employment effects are yet another possibility. In short, advocating cuts in corporate taxation does not address the main issues. Similarly, the growth in social-insurance contributions also seems to have been checked, most notably in the statutory health insurance scheme. Further, there are numerous examples of dampers on wage growth. Flexibility in both hours worked and money wage rates, with a consequent fall in labour costs, were achieved.

As Samuel Brittan wrote in the Financial Times (13 April 2007) ‘It is frequent feature of economic analysis that no sooner has a trend become conventional wisdom than it begins to change’. In spite of the apparent parameters summarised at the beginning of this Section, an observer of economic trends in the German economy can only say ‘Amen to that’!