August 17, 2002

Curing German Unemployment

The Economist pushes the Hartz Commission proposals for German unemployment insurance reform. There is, however, one big difference between the condition of Germany now and the condition of Britain--which the Economist compares Germany to--in the 1990s. In Britain the Bank of England was prepared to make sure that institutional reforms did not just shift the economy from classical unemployment to Keynesian unemployment, but instead led to full employment. It was willing to make sure that aggregate demand was high enough to do the job.

Is the European Central Bank prepared to fulfill a similar mission? I see no sign that it is.


German Unemployment: Too Little, Too Late? ...So the commission's proposals, already broadly backed by employers and trade unions alike, will be put before a special Social Democratic conference this weekend. The cabinet will announce its first measures, ones not requiring legislation, next week, and send further ones to the Bundestag as a bill during the debate on the 2003 budget early next month. Cutting the jobless total in half within three years is feasible, according to the commission, if its recommendations are implemented promptly. The key proposal is for the creation of state-run agencies, alongside the present unemployment offices, which would take on those still unemployed after six months without a job, and hire them out to employers. Any who refused would have their unemployment benefits cut. All the jobless, likewise, would have to be far less choosy than now or face similar cuts: a job might offer up to 20% less than they used to earn, but they would have to accept it; young and single people would have to move anywhere within the country for work. Many of the commission's ideas are similar in approach to the New Deal adopted by the Labour government in Britain after its election in 1997...


German Unemployment: Too little, too late?
Aug 16th 2002
From The Economist Global Agenda


A new report on the German labour market has proposed changes which would create two million jobs and halve the unemployment total in three years. Are the Hartz commission proposals enough to save Chancellor Gerhard Schröder from electoral defeat next month?


IT HAS been an awful summer for Gerhard Schröder. The German chancellor has spent much of the past few days visiting towns and cities devastated by freak flooding in eastern Germany. The floods are threatening lives, homes and crops in what are already the poorest parts of Europe’s largest economy. The election is now barely five weeks away and, even before the rains started, Mr Schröder’s campaign was blighted by a steady stream of grim economic news.

Instead of picking up, the economy is again in deep trouble. The number of jobless is almost back to where it was when Mr Schröder came to office in 1998, and rising. Bankruptcies are soaring, and share prices are in the basement. And the government, lurching from one crisis to another, has no answer to any of them. No wonder opinion polls show the ruling Social Democrats trailing their conservative rivals by 6-8 points, as against 2-4 in June.

So is the game up for Mr Schröder? Most pundits think so. Yet one voter in three is still undecided, and Mr Schröder still holds a couple of potential trumps, one of which is the report of the Hartz Commission formally delivered to the government on Friday August 16th. The government-appointed commission was chaired by Peter Hartz, Volkswagen’s personnel manager and a friend of Mr Schröder’s. The report’s proposals, which were widely leaked in advance, are bold and potentially far-reaching. Mr Hartz said that it was possible to create two million jobs in three years “starting now”.

Unemployment in Germany is now close to the four million plus inherited by Mr Schröder four years ago. At the time, the chancellor said that, if his government could not reduce it, he would not deserve to be re-elected. The commission holds out the prospect that Mr Schröder could go to the electorate with a plausible programme for effective reform.

So the commission's proposals, already broadly backed by employers and trade unions alike, will be put before a special Social Democratic conference this weekend. The cabinet will announce its first measures, ones not requiring legislation, next week, and send further ones to the Bundestag as a bill during the debate on the 2003 budget early next month.

Cutting the jobless total in half within three years is feasible, according to the commission, if its recommendations are implemented promptly. The key proposal is for the creation of state-run agencies, alongside the present unemployment offices, which would take on those still unemployed after six months without a job, and hire them out to employers. Any who refused would have their unemployment benefits cut. All the jobless, likewise, would have to be far less choosy than now or face similar cuts: a job might offer up to 20% less than they used to earn, but they would have to accept it; young and single people would have to move anywhere within the country for work. Many of the commission’s ideas are similar in approach to the New Deal adopted by the Labour government in Britain after its election in 1997.

Mr Schröder is determined not to become the federal republic's first chancellor to be denied a second term in office. With an upturn in support, he might do it. For all his government's woes, he himself remains far more popular than his challenger, Edmund Stoiber, the prime minister of Bavaria. Mr Stoiber scores higher on jobs and the economy, the two main campaign issues. But Mr Schröder is widely seen as the better leader, especially in a time of crisis. The manifestos of the left and right coalitions led by the two leaders suggest little to choose between the two men. Both say they want to boost the economy, create jobs, secure pensions, improve education, help families and pump new aid into the ex-communist East. Both talk of slashing taxes, welfare contributions, government spending and public debt. Neither explains how this two-fold miracle will be achieved.

Even now, most polls suggest that the conservatives and their likely post-election allies, the Free Democrats, will not win an absolute majority of the vote. Everything would then depend on wheeling and dealing after the election. Even if Mr Schröder’s Social Democrats did not emerge as the biggest party, so long as they had done respectably they could still hope to form a minority government with the Greens, tolerated by the ex-communists; or a three-way coalition with the Greens and the Free Democrats; or even, conceivably, one headed by Mr Schröder, with the Christian Democrats, though minus Mr Stoiber and his Bavarians of the Christian Social Union. The fact that such options, most formerly considered taboo by the Social Democrats, are now being seriously considered indicates just how desperate Mr Schröder's party has become.


Posted by DeLong at August 17, 2002 08:14 AM | TrackBack

Comments

There is no reason to believe the European Central Bank is oriented toward optinal growth. The orientations appear to have been and are toward Euro valuations and money supply growth. Slow growth in Europe could be a real problem if the Central Bank keeps so rigid.

Central Bankers can be absurdly rigid - Japan - Europe - Argentina....

Posted by: on August 17, 2002 10:21 AM

The ECB's commitment to low inflation in Euroland isn't the only important difference between Germany and England. I see at least two more:

1) Germany is no longer enjoying an interest rate bonus over the other European countries like it did before 1998. Because of this, even a relaxed ECB policy would help former high-risk countries such as Ireland, Greece and Portugal before it helps Germany. So the ECB can't lower its interest rates to a level that would give Germany its much-needed boost, because it can't do so without overheating the Euroland economy as a whole.

The Bank of England, by contrast, was responsible only for England's economy.

2) Unlike England, Germany has a political system defined by proportionate representation, strong influence of the regions in the Bundesrat (Germany's equivalent of the American Senate), and guild-like structures that have a much stronger influence on everyday economic life (trade unions, employer organizations, and trade organizations ("Handelskammern")are only a few of them.) This means controversial proposals like those of the Hartz commission will never make their way into actual legislation to begin with. No matter how much sense they make, and no matter which side wins our elections in September.

Greetings, Thomas

Posted by: Thomas Blankenhorn on August 18, 2002 10:19 AM

The point of the Euro was to create a United States of Europe. The Central Bank can lower rates to spur growth in Europe as a whole as the FRS has been doing. Europe as a whole is slowing in dramatic fashion. Rate lowering will work on different countries and different sectors unevenly, but the point is to quicken European growth.

Posted by: on August 19, 2002 08:25 AM

If Thomas is right, then Germany made a foolish mistake to adopt the Euro. I also think Thomas must consider Euro countries as a whole. Lower rates are needed. We do not worry that a FRS lowering will speed Wisconsin more than New York.

Posted by: on August 19, 2002 08:28 AM
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