Characteristics of the German Economic Model

December 13, 2013

In recent history, the German economic engine has repeatedly delivered national success.  Today, Germany is not only keeping up with its strong economic performance domestically, but is also leading the restoration of European economic competitiveness.  Its path to success, however, has come under fire, especially since the beginning of the euro zone economic crisis.  On both sides of the Atlantic, there are criticisms of some of the characteristics of the German economic model, including relatively low labor cost and an export-oriented approach to growth.  Dr. Stephen Silvia and Peter Rashish presented their expertise on Germany’s economic and trade policy, with Dr. Silvia looking specifically at the industrial relations and the labor unions in Germany.

Relatively low labor cost has long been listed as one of the defining characteristics of Germany’s industrial competitiveness.  The industrial relations between labor unions, businesses, and the government in Germany are subject to academic and policy curiosity.  Sector-based labor unions have long been responsible for negotiating wages with businesses and governments, instead of centralized labor representation as in some other countries.  However, the level of unionization in West Germany underwent a steady decline after its initial surge in the 1960s.  Reunification then saw the sharp decline in unionization in former East Germany as it became synchronized with the west.  Major unions have been examining the cause of their membership declines.  Certain sectors have seen revived interests in union membership.  Some unions, which promoted participation of members in the decision-making process, also experienced a resurgence in their memberships.  It is yet unclear how the industrial relations in Germany are going to be shaped in the future.

Germany’s strong export sector has recently been in the spotlight, after the U.S. Treasury Department accused Germany of jeopardizing economic recoveries in the rest of the euro zone and not contributing to European economic growth through weak domestic consumption.   Germany has been the target of criticism for its financial and economic policy since the euro crisis.  Its strong advocacy for strict fiscal discipline and government austerity has attracted fierce opposition.  Furthermore, German energy policy has not only stirred anxiety from the German business communities, but also resulted in possible investigation from the European Union for violation of fair competition.  During the review of the German economic and trade policy, it was clear that German policies have impacts beyond the border, extending to the rest of the European Union and to its partnership with the U.S.   The ongoing negotiation on the Transatlantic Trade and Investment Partnership (TTIP) presents an excellent stage to observe the development of German economic policies.  A close transatlantic partnership may imply that Germany has to commit to changing its policy and practices to achieve regulation harmonization with the rest of the EU and the U.S.