The Blueprint for Labor Reforms in Greece: Germany's Agenda 2010

As noted in my post of August 24 (see the lower part: “case study Greece”), the focus on nominal wage reductions to lower unit labor costs [1] and thus enhance the competitiveness of Greek products is a ‘structural’ measure close to the heart of the Schwabian housewives and -men in Berlin. Based on the simplistic assumption that the cost of labor is the only determinant of competitiveness (which is non-sense [2] and without any scientific foundation), this approach reflects the same supply-side bias as the German blueprint: the Agenda 2010, implemented in Germany between 2003 and 2005.

Just as Germany’s Agenda 2010, the labor reforms imposed on Greece encompass a number of employer-friendly measures, such as  

• the lowering of wage and non-wage costs (social security contributions);
• the reduction of unemployment payments;
• the shortening of the eligibility period for unemployment payments;
• the combination of social transfer programs with a requirement to work or attend training to increase the pressure on the unemployed;
• the downward adjustment of public pensions;
• the reduction or elimination of labor market regulations.

It is interesting to examine the political economy of Germany's Agenda 2010 in the context of my post "The role of crises for Troika shock therapy:  Twelve years after Germany’s 1990 reunification at an estimated cost of over EUR 1000 bln and a substantial increase in public debt levels from 38% of GDP to 62% of GDP (see chart below), Germany’s mainstream media, financed by powerful corporate interest groups, proclaimed the reunified country as “the sick man of Europe” due to an alleged lack of competitiveness, even though Germany’s trade surplus nearly tripled from EUR 55 bln in 1990 to EUR 133 bln in 2002. Apparently, despite Germany’s obvious export performance, an articifial crisis needed to be constructed to push through cut-backs in Germany's social security system so as to reduce the public debt, effectively passing on the reunification costs to lower and middle income groups.

At about the same time in 2002, Bertelsmann Trust, owner of 80.7% of the global media conglomerate Bertelsmann S.E.[3] headquartered in Gütersloh/Germany, published a catalogue of economic demands which magically found its way into the economic reform program for the second Schröder government, called Agenda 2010:

- measures to reduce wage and non-wage labor costs;
- cuts in unemployment benefits and social welfare payments;
- the relaxation of employee protection against dismissals;
- drastic cuts in public pensions;
- and other employer-friendly reforms.

Today, corporate interest groups and the mainstream German media claim that Agenda 2010 has been successful in reducing the rate of unemployment and laying the foundation for more dynamic growth in Germany. Don’t you believe it ! German economic growth increased and unemployment declined thanks to a booming global economy from 2005 until the 2008 Global Financial Crisis and, after a crisis-induced slump in 2009, from 2010-2011. During the crisis, German unemployment rates held steady as a result of a brilliant policy measure proposed by Olaf Scholz, the social democratic mayor of the Hanse-City of Hamburg: namely, the introduction of reduced working hours (Kurzarbeit) at reduced pay. This ingenious policy move not only held unemployment rates steady thanks to an immediate reduction in nominal labor costs, but also saved employers the turnover costs associated with the firing and re-hiring of workers, and ensured the immediate availability of trained, competent, and motivated employees when economic activity picked up again in 2010 and 2011. In 2012, however, as the global economy slowed down and the demand for German products declined due to the austerity policies in Europe, German economic growth has also been affected (see my post of August 2: "Austerity chickens are coming home to Germany") and German unemployment rates are creeping upwards.

Fact is, the supply-side measures of Agenda 2010 did attain an improvement in the cost competitiveness of German products, but at a steep price:

First, at the expense of a massive worsening of living standards for the German population, with broadbased declines in real wages, a transfer of non-labor costs and risks from the employer to the employee, the creation of a low-wage sector and the widespread use of precarious employment contracts formerly unknown in Germany, as well as the near destruction of the public pension system.

Second, at the expense of other eurozone exporters. The effective competitive real devaluation of German tradables resulted in mounting trade surpluses vis-à-vis other eurozone countries and is largely responsible for the huge economic imbalances that are at the root of the euro crisis.

Third, at the expense of financial stability: As German exports boomed, export revenues and corporate profits exploded, German banks invested the incoming tsunami of capital in US mortgage-backed securities, seemingly risk-free sovereign bonds, CDS, CDOs, and other toxic assets….and the rest is history….

Conclusion
For those who argue that Germany’s Agenda 2010 should be a blueprint for an improvement in competitiveness in other eurozone countries, allow me to cite Albert Einstein:

                    “The definition of insanity is doing the same thing over and over again
                                                         and expecting different results.”

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[1] Unit labor cost = average cost of labor per unit of output.
[2] Unit labor cost (the standard measure of competitiveness) can also be reduced by an increase in output (the denominator). While holding labor costs constant, output can be increased through productivity enhancements which in turn can be achieved by investing in human resources (education, work training) and the tools they work with (investment in research and development). Such investments would have the added benefit to increase aggregate demand, employment, and economic growth, exactly what Greece needs right now !
[3] Bertelsmann S.E. includes Bertelsmann Music Group, RTL, Random House, and other media companies, including part ownership of Gruner & Jahr and Time Inc.