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The German Employment Miracle in the Great Recession, 2008-2009 and the Debt Crisis Ahead

The German Employment Miracle in the Great Recession, 2008-2009 and the Debt Crisis Ahead. Michael C. Burda Humboldt University Berlin 19 May 2011. Executive summary , I.

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The German Employment Miracle in the Great Recession, 2008-2009 and the Debt Crisis Ahead

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  1. The German Employment Miracle in the Great Recession, 2008-2009and the Debt Crisis Ahead Michael C. Burda Humboldt University Berlin 19 May 2011 Assessing the German Employment Miracle in the Great Recession 2008-9

  2. Executive summary, I • Germany recovered quicker and with less job loss than any other OECD country except Australia, despite an initial output drop greater than in the US. • In one sense there was no miracle – normally recessions in Germany are met by a stronger decline in hours per employed worker than in employment. Statistically, this recession is not unusual • The miracle is that government short-time played less of a role given the outsized recession. • The key role was played by private factors, often negotiated at the plant level with works‘ councils and with only moderate input from unions. • Labor market reforms (“Hartz Reforms”) and an explosion of the temporary help industry has led to cost moderation and more flexible labor markets. • It is wrong to assume that Germany has merely papered over structural problems. Firms went through significant restructuring in the first half of the last decade and are in good shape, financially and in terms of market share. • This assessment is supported by surveys and anecdotal evidence as well as capitalization numbers of German companies. Assessing the German Employment Miracle in the Great Recession 2008-9

  3. Executive summary, II • Germany has also been very lucky regarding the macroeconomic backdrop, replacing lost demand from the PIGS countries and US with strong demand from the BRICs • Internal investment demand is picking up briskly • There are some signs of a real estate boom in the making – German property prices stagnated over the past 15 years, in contrast to almost every other European country. • Euro crisis poses a significant threat to the future. An uncontrolled Greek default has the potential dimensions of the Lehman debacle. • Any of the proposed solutions to the PIGS problem will involve risks. Even an expansion of bailout may have political blowback in Germany. • The reintroduction of the drachma could cause a chain reaction of similar exits across the Euro-periphery and Ireland, leading to a Euro breakup • All these possibilities will dampen the German recovery, although the appreciation will lead to higher internal demand, reorientation of activity to core countries and possible real appreciation of a NEURO Assessing the German Employment Miracle in the Great Recession 2008-9

  4. Facts • Decline in economic output (GDP) associated with the steep drop in international trade • Decline in hours worked • Decline in hours/employee • What happened to employment? • What happened to wages and productivity? • Sectoral composition of output Assessing the German Employment Miracle in the Great Recession 2008-9

  5. Assessing the German Employment Miracle in the Great Recession 2008-9

  6. Assessing the German Employment Miracle in the Great Recession 2008-9

  7. Assessing the German Employment Miracle in the Great Recession 2008-9

  8. Assessing the German Employment Miracle in the Great Recession 2008-9

  9. : Germany Value addedandemploymentbysector: Germany Assessing the German Employment Miracle in the Great Recession 2008-9

  10. Value addedandemploymentbysector: US Assessing the German Employment Miracle in the Great Recession 2008-9

  11. Explanations • Short-time work (Kurzarbeit) • Concession bargaining (Arbeitszeitkorridore) • Working time accounts (Arbeitszeitkonten) with upper bounds and seniority • Wage moderation, possibly influenced by the Hartz Reforms • Adjustment costs (high costs of layoffs) plus optimistic expectations, plus flexible temp work • …what was most important? Assessing the German Employment Miracle in the Great Recession 2008-9

  12. Facts • How important was short-time work (Kurzarbeit)? Answer: Important, but not significantly different this time from past recessions in Germany Assessing the German Employment Miracle in the Great Recession 2008-9

  13. German unificationandthecollapseofthe East German economy Assessing the German Employment Miracle in the Great Recession 2008-9

  14. Facts • How important were flexible work accounts (Arbeitszeitkonten)? Answer: very Important, in a way significantly different from past recessions in Germany Assessing the German Employment Miracle in the Great Recession 2008-9

  15. Significantbuildupofexcessovertimehoursandrun-down after thecrisishit Assessing the German Employment Miracle in the Great Recession 2008-9

  16. Facts • How important was outsourcing of work by way of temporary work agencies (the „cheap“ extensive margin)? Answer: Important. In Germany temporary agency work is performed by workers on normal legal contracts for temporary work agencies. Firms (especially in manufacturing) use this agency work to vary employment without varying their own head count Assessing the German Employment Miracle in the Great Recession 2008-9

  17. Die Zeit, 10.2.2011 Assessing the German Employment Miracle in the Great Recession 2008-9

  18. A recipeforbeatingthecrisis? Working Time Accounts Short time work Temporaryagencyworkers Assessing the German Employment Miracle in the Great Recession 2008-9

  19. Out ofthefire, intothefryingpan? • The hard-won competitiveness of German firms and export surplus of the German economy came at a cost: current account deficits of the Med countries • This debt has accumulated silently and has now reached epic proportions • This is government debt owned by banks • And banks operate cross borders… Assessing the German Employment Miracle in the Great Recession 2008-9

  20. Collateral Damage: Europe’s Crisis • Real growth (GDP at constant prices, % p.a.) 2008 2009 (IMF) • D 1.2 -5.6 • F 0.7 -2.9 • UK 0.7 -4.1 • I -1.4 -4.5 • IRL -2.7 -8.0 • NL 2.0 -4.7 • E 1.2 -3.0 • DK -1.1 -4.0 • USA 1.1 -2.8 Assessing the German Employment Miracle in the Great Recession 2008-9

  21. Collateral Damage: Europe’s Crisis • Consolidated fiscal surplus (% of GDP, IMF) 2008 2009 (IMF) • D -0,1 -4,7 • F -3,4 -6,2 • UK -5,4 -9,8 • I -2,7 -5,4 • IRL -6,4 -14,2 • NL 0,8 -3,2 • E -3,8 -7.5 • DK 3,0 -2,0 • USA -6,1 -13,6 Assessing the German Employment Miracle in the Great Recession 2008-9

  22. 0 20 40 60 80 100 120 140 -4 0 4 8 12 198 143 125 119 97 96 93 93 84 83 82 80 80 72 68 63 61 60 55 52 48 45 44 42 41 40 39 39 -3% 38 38 33 31 24 18 16 7 60 0 20 40 60 80 -16 -12 -8 -4 0 4 8 12 Debt (left) und Public Financing Surplus (right) in % of GDP 2010 Japan 9,5 Norwegen + Griechenland 1,6 Südkorea Island 0,1 Estland Italien 0,0 Schweden Belgien -0,7 Schweiz Irland -1,8 Luxemburg Portugal -2,5 Finnland USA -2,7 Dänemark Kanada -3,2 Bulgarien Deutschland -3,3 Australien Frankreich -3,3 Deutschland Ungarn -3,6 Malta Großbritannien -4,1 Belgien Österreich -4,2 Ungarn Malta -4,6 Österreich Niederlande -4,6 Italien Zypern -4,7 Tschechien − Spanien -4,9 Kanada Polen -5,3 Neuseeland Norwegen -5,3 Zypern Finnland -5,4 Niederlande Lettland -5,6 Slowenien Dänemark -6,3 Island Schweiz -6,4 Rumänien Slowakei -7,0 Frankreich -7,1 Schweden Litauen Neuseeland -7,7 Japan -7,7 Tschechien Lettland -7,9 Litauen Polen -7,9 Slowenien Slowakei -9,1 Südkorea Portugal -9,2 Rumänien Spanien -10,4 Australien Großbritannien -10,5 Luxemburg USA -10,5 Bulgarien -32,4 Griechenland 2010 Estland Irland Assessing the German Employment Miracle in the Great Recession 2008-9 April 2011

  23. Yield spreads of 10 year government bonds relative to Germany Jan 2008 – June 2010 Assessing the German Employment Miracle in the Great Recession 2008-9

  24. Greek debt by county, 2010 Quelle: der Spiegel Assessing the German Employment Miracle in the Great Recession 2008-9

  25. Greece’s Creditors 2011 Quelle: der Spiegel Assessing the German Employment Miracle in the Great Recession 2008-9

  26. Best Case Scenario • EU Commission tries to impose an IMF-style program on Greece to restore investor confidence • In consideration of the fiscal hardship, the EU offers stabilization program with “tough love” • The Greek government accepts, the world economy recovers, bond yields fall again • Greece stays in the Euro area and restores fiscal responsibility, albeit painfully Assessing the German Employment Miracle in the Great Recession 2008-9

  27. Worst Case Scenario • The EU Commission tries to impose an IMF-style program on Greece to restore investor confidence • The political consequences of the program raise domestic anger and resentment of EU, Euro • Financial markets continue to short Greek debt, interest rates rise, budgetary problems mount • The Greek government collapses, politicians blame the ECB for not bailing Greece out • Greece exits the Euro, reintroduces the drachma, or defaults unilaterally • Other countries may be tempted to follow – it’s not just about Greece Assessing the German Employment Miracle in the Great Recession 2008-9

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