HOW SUSTAINABLE IS THE GERMAN MODEL OF ECONOMIC GOVERNANCE?

By Samson Yuchi MaiStaff WriterThe global economic outlook for the near future does not look bright and the outlook for Germany is not much different. The Deutsche Welle reported that more German businesses are reporting “not so good” expectations in future economic climate and the numbers back it up. Reuters states, “Germany's composite PMI [Purchasing Manger’s Index, a measure of manufacturing activity] fell to 47.0, chalking up its lowest reading since June 2009 when the euro zone was in the middle of the worst recession since World War Two.” According to MarketWatch, Germany grew by 0.3% in the second quarter of 2012. These figures fail to foster confidence in Germany’s current approach to economic policy making.Considering the dreary economic climate compounded by the Eurozone crisis and the crippling liabilities in its domestic budget, the German economic model, or, Modell Deutschland, is facing pressures to adapt. The majority coalition of the Christian Democrats (CDU), Christian Social Union (CSU) and Social Democrats (SPD) are committed to a social market economy. Their concept of a mixed economy will remain the same, but there will be tweaks here and there in order to balance the state books. Certain areas and issues need to be highlighted and remedied given their macroeconomic implications.The most imminent threat to sustaining economic growth is increased immigration. To make immigration more politically attractive for resisting political factions, immigration must incorporate some form of cultural assimilation. Meaning, there should be additional courses on German language, culture, and values. This will alleviate some people’s fears of Germany society changing into something totally different and unwanted. A UN Report in 2000 found that Germany would require annual net migration of 3.5 million people to maintain population and to replenish labor force at sustainable levels comparable to those seen in 1995. Germany may need even more immigration to sustain annual GDP growth rate of 3-4% to remain economically competitive. To target those immigrants who would make Germany more economically competitive in a post-industrial economy, immigration policy has to attract high skill workers and those who are looking for returns on investments. Germany can adopt something like the Canadian system in which immigrants are allowed in if they obtain a certain number of points which is skewed toward more education attainment, more years employed and certain fields of expertise.Another important structural obstacle that needs to overcome is the disparity of economic performance between the West and the East. The federal government should continue its efforts to close the productivity gap using investments projects focusing on infrastructure. According to a study conducted by Dr. Joachim Ragnitz, to overcome the deficits in human capital, policies have to be implemented to counter outflow migration due to lower educational returns. There needs to be additional focus on higher education and workforce placement afterwards. To attract more businesses to the East, selective incentives like lower taxes have to be instituted. Greater economic performance is hindered when half of the country is not as productive. Parity must be a priority for the federal government.One particular aspect of the Rhineland model that has to change is the rigid labor structure. The Termination Protection Act passed in 2004 protects employees from unilateral and arbitrary dismissals. Employers have to go through a long and rigorous process to prove that the worker is an economic liability which potentially takes years. This discourages firms from hiring new workers which factors in the persistent high unemployment rate of 7-10% over the last 10 years. This legislation needs amendments that would decrease the amount of time and red tape to let a person go. This would allow businesses to hire new workers and motivate those working to be more productive.While Germany has undergone a serious economic slowdown, viable solutions are not out of reach. Immigration reform that is directed toward high-skilled workers will bolster innovation. If this is coupled with revision in tax and hiring policy, the East has a chance at reaching economic parity in the long run by encouraging investment. With an equally powerful East and West, Germany can restore itself as the regional economic hegemony it is capable of being.Photo by World Economic Forum