Some time ago I wrote a blog – The German model is not workable for the Eurozone (February 3, 2012) where I outlined why Germany’s export-led growth strategy could not be a viable model for the rest of the Eurozone nations. More recent data shows that Germany is not even working very well in terms of advancing the prosperity of its own citizens. A recent report (in German) – Der Paritätische Gesamtverband (HG): Die zerklüftete Republik (The Fragmented Republic) – shows that poverty rates are rising in Germany and there is now a dislocation emerging between unemployment and growth and poverty rates. The reason is clear – too much neo-liberal labour market deregulation and ridiculously tight fiscal policy. Both failing policies that Germany continues to insist should be adopted throughout Europe. It would do the other Member States a service if they banded together and rejected the ‘German poverty model’.
In the early 1980s, Germany embraced the growing neo-liberal myth that the alleviation of poverty was a participatory enterprise – that the poor had to develop their own productive capacities to get themselves out of their situation. That the Government could do very little.
The German Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung (BMZ) (the Federal Ministry for Economic Cooperation and Development) set up a national task force to develop the concept that individuals had to take responsibility for their own poverty fight before external help would be forthcoming.
The BMZ was influential in OECD and World Bank policy shifts in this regard. It has also been a major player in the – United Nation’s Millennium Declaration – in 2000 and the subsequent – Millennium Development Goals (MDGs) – which have defined the global fight against poverty since 2001.
For reference to the BMZ approach, see their 2010 document – The Millennium Development Goals: Background – Progress – Activities BMZ Information
At the time of writing, there were 303 days, 9 hours, and 36 minutes (and some seconds) to go before the end of 2015 when the 189 nations that signed up to the Declaration will conclude whether they have been the Eight MDG targets.
None will go close!
The Germans are heading in the wrong direction.
In its 2012 Special Paper 146, the BMZ is long on rhetoric – “Pro-Poor Growth” a focal point of development policy – claiming that a:
Pro-poor growth (PPG) is a strategic approach whereby economic growth is specifically used to reduce poverty. The focus is on promoting the economic potential of (extremely) poor and disadvantaged people.
We learn that:
The primary target group of PPG projects is the (extremely) poor and disadvantaged people who can be integrated into the growth process by enabling them to engage in productive employment and entrepreneurial activities … A decisive factor for income distribution and for broad-based participation in economic growth is that as many people as possible have access to productive employment.
The German government has done exactly the opposite to what its key developmental agency advocates.
The organisation – Social Watch – which is dedicated to eradicating poverty and achieving gender justice, wrote in 2002 that the BMZ was more about – AntiPoverty Rhetoric: More Programme than Action – when it came to achieving the MDG targets.
Its most recent report on Germany poverty reduction efforts (2010) – Neglecting the poor and the environment – concluded that real wage cuts associated with the GFC and the expansion of part-time work has seen a rise in poverty rates.
A 2009 – IAQ Report – 2009-05 – from the Institut Arbeit und Qualifikation (Institute for Work, Skills and Training) located at the University of Duisburg-Essen – – found that:
1. The average real wage in the low-wage sector had not increased since 1995 and in recent years declined in the West German regions.
2. The number of low-wage workers rose by 350,000 between 2006 and 2007, comprising around 21.5 per cent of the total wage earners in Germany. In 1995, this share was well below 15 per cent.
3. More than 20 per cent of workers are now working at hourly rates which are below the minimum wage.
4. A declining percentage of workers without formal educational qualifications now make up the low-pay workforce. In other words, formal education is now longer a guarantee (as it was in the past) of a well-paid job in Germany.
All this is not surprising. As I have documented in the past, Germany took a particular route to Eurozone leadership in the early years after the common currency was introduced.
In my soon to be – published book – on the Eurozone, I devoted a chapter to the German Jobwunder!
Once the common currency emerged and Germany lost the ability to manipulate its exchange rate to its advantage (forget the rest), the next strategy it employed was to attack its own workers.
A reasonable argument can be made that Gerhard Schröder helped cause the Eurozone crisis. His government’s response to the restrictions that Germany encountered on entering the EMU are certainly part of the story and one of the least focused upon aspects.
Upon entering the EMU, Schröder was under immense political pressure to do something about the high unemployment in the East after reunification.
Without the capacity to manipulate the exchange rate, the Germans understood that they had to reduce domestic production costs and inflation rates relative to other nations, in order to retain competitiveness.
The Germans thus took the so-called ‘internal devaluation’ route that is all the rage in Europe now, well before the crisis; a move, which ultimately has made the crisis worse.
When Schröder unveiled his Government’s ‘Agenda 2010’ in 2003, it was clear that they were going to income support systems and ensure that Germany’s export competitiveness endured despite abandoning its exchange rate flexibility.
It was dressed up in the language of flexibility and incentive, but was based on the mainstream view that mass unemployment was the result of a workforce rendered lazy by the welfare system, rather than the more obvious alternative, that it arose due to a shortage of jobs.
The so-called ‘Hartz reforms’ were a major plank of the strategy and resulted from a 2002 commission of enquiry, presided over by and named after Peter Hartz, a key Volkswagen executive.
The aim was clear, unemployment benefits had to be cut and job protections had to go. The recommendations were fully endorsed by the Schröder government and introduced in four tranches: Hartz I to IV, starting in January 2003.
The changes associated with Hartz I to Hartz III, took place over 2003 and 2004, while Hartz IV began in January 2005.
The changes were far reaching in terms of the existing labour market policy that had been stable for several decades.
The so-called supply-side focus saw unemployment as an individual problem and advocated that continued income support should be conditional on a raft of increasingly onerous activity tests and training schemes.
Further, governments abandoned their responsibility to reduce unemployment with properly targeted job creation schemes.
Public employment agencies were privatised spawning a new private sector ‘industry’ – the management of the unemployed!
The Hartz reforms accelerated the casualisation of the labour market and the precariousness of work increased. Hartz II introduced new types of employment, the ‘mini-job’ and the ‘midi-job’ and there was a sharp fall in regular employment as a consequence.
Mini-jobs provide marginal employment with no security or entitlements and allow workers to earn up to 450 euros per month without paying taxes, while the on-costs for employers are significantly lower. The no tax obligations also mean that the worker receives no social security protection or pension entitlements.
The neo-liberal interpretation of these changes is that Germany underwent a ‘jobwunder’, or jobs miracle.
However the speedy increase in employment can also be viewed less optimistically.
The following graph charts the history of the mini-jobs since 2003. In September 2013, there were 7.4 million ‘mini-jobs’, which represented 17.4 per cent of the labour force between 15 and 64 years of age.
The proportion has been fairly steady since late 2007 after a rapid increase in the earlier years of the scheme.
The rapid increase in mini-jobs meant an increasing (and sizeable) proportion of the German workforce were forced to work in precarious jobs with extremely low pay and were excluded from enjoying the benefits of national income growth and the chance to accumulate pension entitlements.
Pay differentials have widened considerably in Germany since 2003 and various studies have found no evidence of large-scale worker transition from ‘mini-jobs’ to other, more regular work. ‘Mini-job’ workers are increasingly trapped in this form of marginalised employment.
The Government in cahoots with industry also engineered a massive redistribution of national income to profits and away from wages.
In general, German real wages (the purchasing power equivalent of the wages received by workers each week) failed to keep pace with growth in productivity (how much workers were producing each hour) and as a result there was a massive redistribution of national income to profits.
The following graph shows the – AMECO – (Annual Macroeconomic) database measure of Real Unit Labour Costs, provided by the European Commission (Annual Macroeconomic).
Please read the answer to Question 1 in the blog – Saturday Quiz – June 14, 2014 – answers and discussion – for more discussion on what RULCs mean.
Basically they are the ratio of real wages to labour productivity and if they are falling it means that productivity growth is rising faster than real wages and redistributing national income towards profits.
So the RULC measure is equivalent to the share of wages in national income. If it falls, workers have a lower share in real GDP.
The rise in the shares during the crisis signifies the fact that national GDP (output) was falling while total wages were not falling as fast or were relatively constant. As a consequence the ratio of the two rose.
Why does this matter? Until the early 2000s, real wages and labour productivity had typically moved together in Germany as they did in most advanced nations.
If real wages and labour productivity grow proportionately over time, the share of total national income that workers (wage earners) receive remains constant.
However, once the neo-liberal attacks on the capacity of workers to secure wage increases intensified in the 1980s in many nations and, later in Germany, a gap between the growth in real wages and productivity growth opened and widened.
This led to a major shift in national income shares away from workers towards profits.
The capitalist dilemma was that real wages typically had to grow in line with productivity to ensure that the goods produced were sold. If workers were producing more per hour over time, they had to be paid more per hour in real terms to ensure their purchasing power growth was sufficient to consume the extra production being pushed out into the markets.
How does economic growth sustain itself when labour productivity growth outstrips the growth in the real wage, especially as governments were trying to reduce their deficits and thus their contribution to total spending in their economies? How does the economy recycle the rising profit share to overcome the declining capacity of workers to consume?
The neo-liberals found a new way to solve the dilemma. The ‘solution’ was so-called ‘financial engineering’, which pushed ever-increasing debt onto households and firms in many nations.
The credit expansion sustained the workers’ purchasing power, but also delivered an interest bonus to capital, while real wages growth continued to be suppressed.
Households in particular, were enticed by lower interest rates and the vehement marketing strategies of the financial engineers. It seemed too good to be true and it was.
Germany adopted a particular version of this ‘solution’.
The funds to underwrite this credit explosion came from the increased profits that arose from the redistributed national income.
For some nations, such as Germany, the large export surpluses also provided the funds to loan out to other nations.
Germany didn’t experience the same credit explosion as other nations. The suppression of real wages growth in Germany and the growth in the (very) low-wage ‘mini-jobs’ meant that Germany severely stifled domestic spending up to 2005
The result was that growth (what there was) was driven by net exports and domestic demand was flat.
Schröder’s austerity policies forced harsh domestic restraint onto German workers, which meant that Germany could only grow through widening external surpluses.
So the external strategy, which has caused irreparable harm to its Eurozone partners, has also impoverished its own population. The German approach, which is echoed in the basic design of the common currency and the fiscal and monetary rules that reinforce it, could never be a viable model for prosperity throughout Europe.
Poverty rising in Germany
Which brings me to the most recent German poverty report mentioned in the Introduction – Der Paritätische Gesamtverband (HG): Die zerklüftete Republik.
The Report was published by – Der Paritätische Gesamtverband – which is an association of various social movements dedicated to advancing “social justice: equal opportunities, the right of every human being to live a life of dignity in which they can develop freely”.
It was formed “after the First World War as an alliance of hospitals” and now “encompasses more than 9000 organisations and working groups representing different aspects of the broad spectrum of social work”.
It is “Germany’s largest umbrella organisation of self-help initiatives in the area of health and social work”.
The Report’s main findings are:
1. The overall German poverty rate (measured as a person’s income being less than 60 percent of the average income after adjusting for household size) was 15.5 per cent in 2013 and rising. It is now at its highest level since the 1990 reunification.
2. 13 of the 16 German states experienced a rise in poverty rates.
3. The regions with the largest increases in poverty also had above-average economic growth.
4. The regional disparity is now much higher with the difference between the lowest and highest poverty rate area rising from 17.8 percentage points in 2006 to 24.8 percentage points in 2013.
5. The usual victims – the unemployed (60 per cent of them are poor) and single parients (40 per cent of them are poor) figure prominently. Both have endured rising poverty rates since 2006.
6. Child poverty is very high (“Die Kinderarmut bleibt in Deutschland weiterhin auf sehr hohem Niveau”).
7. The fast growing group in poverty are those on aged pensions.
The following map (Map 1 in the Report) shows the fragmenting Germany regional society. This level of regional disparity is significant and poverty is clearly widespread.
The accompanying Table (Tabelle 2 in the Report) compares the Poverty Rate (Armutsquote) with the SGB II-Quote from 2006 to 2013 across the States.
The SGB II ratio is the proportion of persons under 65 entitled to benefits (unemployment and social benefits).
It is clear that there is a negative relationship between those receiving unemployment and social benefits and poverty rates in the German States.
To give you a graphical view of that relationship and to highlight the degree of regional disparity (which is of course, magnified within states), I produced the following two graphs.
The first is graphing the relationship between the proportion of persons under 65 receiving benefits (SGB II ratio) (horizontal axis) for Germany from 2006-13 and the poverty rate.
The second graph plots the same relationship for the German States. The first graph shows the strength and consistency of the negative relationship at the Federal level.
The second shows the disparity between regions.
During the 2013 Federal election campaign, the German government used the slogan – “die Einkommensschere in Deutschland schließe sich wieder” (Continuing to close the income gap) – to divert criticisms of the damage that the Hartz IV labour market changes had caused to workers’ well being and poverty rates.
It is quite clear that the promise to reduce poverty is contrary to the evidence available in this Report.
The Report makes it clear that the relationship between economic growth and income poverty no longer exists (“Was den Zusammenhang von Wirtschaftswachstum (als Grundlage des volkswirtschaftlichen Reichtums) und Einkommensarmut anbelangt, lässt sich keine sinnvolle Korrelation mehr erkennen”)
So that economic growth no longer reduces poverty. Why is that?
The reason for the decoupling of economic development and poverty trends is not that economic growth doesn’t produce wealth (sorry for the double negative).
It is that the growing inequality has concentrated the rising wealth and the rising poverty rates are evidence of that.
Even the relationship between poverty and unemployment has changed. The Report notes that since 2006 the poverty rate has risen while unemployment rates have fallen.
The clue to these various linked trends is the growth in the “working poor”. The Report says that:
Wenn Armutsquoten steigen, während die Arbeitslosenquote ganz deutlich sinkt, und die Zahl der Langzeitarbeitslosen, die sich hinter der SGB II-Quote verbirgt, mehr oder weniger stagniert, so weist dies zum einen auf das Phänomen der „working poor“ hin, das in Deutschland, beschleunigt durch die Hartz-Reformen
In other words, they are linking the rising poverty rates and declining unemployment to the rise of the working poor created by the Hartz ‘reforms’, which created a growing number of people in the low-wage sector and the rise of precarious employment.
Well-paid employment is falling in Germany and the benefits from growth are being increasingly enjoyed by fewer people.
The rump of low-paid workers who live below the poverty rate is now rising as a consequence.
That is not a model for Europe.
Here is a – Photo – taken by Jan-Philipp Strobel for Agence France-Presse, of a homeless man lying in a street in Dortmund on October 25, 2013.
The blanket he is using for some warmth bears a striking similarity to a national flag south of Germany! Irony.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.