New Lessons from Old Europe

Just a few years ago we spoke derisively about Eurosclerosis-high unemployment, inflexible labor market, and so on.  How times have change.

Unemployment in German is now lower than in the U.S. (a 7.7% jobless rate compared to 9.5% in the States).  This is remarkable.  Inflation and both public and private debt are much lower than in the U.S.  Sure, both corporate profits and productivity in Germany lag behind the U.S. (although productivity per hour worked is higher, Germans work many fewer hours).  The New York Times (2.4.2010) reports that German profit margins have fallen to 0.6% from over 6% in 2008; in the U.S. profits are down to 3.6% from 7.8%.

But the German system is more stable; it is a trade-off: lower profits for greater stability.  And while there is much to be celebrated about the dynamism of the U.S. economy, our current situation also makes clear the virtues of a degree of stability.

In the current financial crisis, Germany responded with a modest stimulus package.  Indeed, it was far too modest for Obama's tastes, but it has worked in terms of keeping unemployment low and thus maintaining (already low) domestic consumer demand.

The Kurtzarbeit ("short work") program provides government subsidies to companies to keep on their employees but reducing their working hours.  German companies have largely embraced the program, and go beyond its mandates, to keep workers, reducing their productivity but allowing them to keep the talent they have built up, to save it for better times.

The engine of the German economy are the Mittelstand businesses, small to medium sized enterprises that are often family or otherwise privately owned.  The Mittlestand have a reputation for honoring a commitment to their employees, embracing the German system of stakeholding and co-determination.  And this commitment shows through in keeping workers employed in hard times.  A key work in German discourse is "solidarity," and this embrace of the concept of solidarity produces different incentive structures for Mittlestand management.

Mittlestand companies rely on the patient capital of Germany's cross-holding banking system.  But the Landesbanks are under threat because of their ill-time foray into the U.S. exotic derivative market and from E.U. regulations to promote competition, and thus penalize state subsidies of banks.  Indeed, the current reforms in the German banking system may have a much wider impact than is thought, in terms of capital markets and their social implications.