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Book review on: "Germany's Economic Performance. From Unification to Euroization", Jens Holscher, Editor

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The European Journal of Comparative economics
Vol. 4, n. 2, pp. 333-336
ISSN 1824-2979
Available online at http://eaces.liuc.it
Book review on:
Germany’s Economic Performance. From
Unification to Euroization,
Jens Holscher (editor)
1
by Vittorio Valli, University of Turin
In the 1990-2005 period the German economy experienced dramatic changes, partly
associated to the German reunification process.
The main interest of the book, which comprises the papers presented at a 2005 Anglo-
German international conference, consists in the contribution of several distinguished
German and British economists to the critical debate on the consequences of
reunification.
There is an almost general consensus that the slow and sluggish growth performance
of the German economy in the 1993-2005 period is not only due to the difficulties of
reunification, but also to bad or inadequate economic policies pursued by the German
government and by the EU institutions.
The late economist and banker Norbert Kloten is particularly harsh “ … I intend to
show that ..the German disaster has to be judged principally as political lapses and
ignorance, and not to be linked directly to reunification..” (p. 15).
Stephen Frowen in his key- note address is more balanced. He maintains that the task
of integrating an economically ruined country as the German Democratic Republic
with the flourishing West Germany was difficult. Reunification entailed some short-
term advantages, but severe difficulties afterwards. The currency and financial crisis of
September 1992 was a crucial moment. The British decision not to devaluate, but to
leave the ERM, was unfortunate, since it contributed to preclude an early entry of the
United Kingdom in the eurozone, where the UK “ might have exercised its influence
to introduce a greater degree of flexibility in setting ECB’s monetary policy..” (p. 10).
Moreover, Frowen, who in February 1998 was one of the 155 German - speaking
economists advocating a postponement of the German entry in the EMU, sustains
that in retrospect his position was correct. With the heavy financial burden of
reunification Germany was unable to continue to entirely fulfil the Maastricht
requirements. In particular in November 2003 France and Germany determined the
crisis of the Growth and stability Pact, thus revised in 2005, blocking the sanctions
against their excessive public deficits. Finally, he sustains that although the German
stagnation was mainly due to structural factors, it was greatly worsened by two shocks:
the persistent high level of oil prices and the strong appreciation of the euro.
After an elegant and concise summary given by Holscher in his introduction, two
introductory papers by Frowen and Kloten and an obituary on the latter written by
Frowen, the book presents four parts. The first part is on monetary issues, the second
one focuses on macroeconomic performance, the third on structural developments
and the fourth on East Germany: A stimulating paper by Norbert Walter on
investment in Germany concludes the book.
The essays cover a wide range of topics.
1
Palgrave Macmillan, Houndsmills, Basingstock, Hampshire, 2007, pp. XIX, 263, hardback, 95 $
EJCE, vol. 4, n. 2 (2007)
Available online at http://eaces.liuc.it
334
In part one they are: monetary transparency (Biefang-Frisancho Mariscal and
Howells), a severe critical assessment of ECB’s record (Bibow), monetary targeting by
the German Bundesbank (Heering) and a comment on part 1 by Soufani.
Part 2 comprises two papers with almost opposite views and a comment by Waltraud
Schelkle. The first paper, by Horst Feldmann, maintains that the breach and dilution
of the Growth and Stability Pact was mainly due “ to lack of political will” by
Germany, France and Italy, not to the slow rate of growth of the German economy.
In fact also on cyclical adjusted terms there would have been a worsening of the
public deficit. The paper thus advocates more rigorous fiscal policies. On the contrary
the second paper (by Hein and Truger), following a neo-keynesian approach,
attributes to the excessively deflationary monetary policy and to the insufficient
increase of wages and internal demand much of the responsibility of Germany
economic poor growth performance of the 1995-2005 period.
In her comment on the two papers Waltraud Schelkle takes a balanced position,
arguing that Germany is not “the sick man of Europe”, but suffers a mid- life crisis”
to be overcome by prudent and gradual measures.
Part III comprises a paper by Lothar Funk (Current structural changes: challenges for
the German labour market and collective bargaining) and a comment by Eric Owen
Smith. Lothar Funk maintains that some mega- trends such as globalization, the move
towards a service society, the greater use of information technology and the ageing of
society, have changed both the composition of labour demand and supply and the
industrial relations system. There has been an increase in the demand for skilled
labour and a relative decline in the demand of unskilled labour. The labour market and
the collective bargaining system have only partially adjusted to the changed situation
and this has contributed, together with the employment difficulties due to the
reunification, to maintain high levels of unemployment in the country. A wider
relaxation of sectoral collective bargaining, and more “opening clauses” might have
substantially reduced the problem. In his comment Eric Owen Smith underlines that
the German labour market has already substantially changed (through increasing
flexibility of hours worked and of money wages rates, a great rise in the number and
proportion of part-time jobs, etc.) and that perhaps too much attention has been given
to the inefficiency of the labour market as an explanation for high unemployment,
while also several other factors such as the inflexibility of the capital market, problems
associated to corporate governance, the macro-economic shocks due to unification
etc., have had consistent adverse effects on employment.
Part IV consists in two papers, by Johannes Stephan and Michael Kaser, dedicated to
East Germany.
Johannes Stephan analyses the differences in labour productivity between East and
West Germany. While in 1991 the average level of productivity in manufacturing, was
in the East about 17,8% of the western level, the gap was reduced to about one third
in 2002, but has remained almost stagnant since the end of the 90s. On the basis of a
firm specific data-set in four sectors (machinery, cosmetics, electro-technical firms,
furniture), Stephan has tried to capture the importance of some managerial differences
in order to explain the East -West gap in productivity. He discovered that such
managerial aspects as the intensity of use of modern communication technologies,
strategic planning, networking etc., were indeed relevant.
Michael Kaser’ s paper tries to compare East Germany economic transition with three
other former communist countries: the Czech Republic, Hungary and Poland. He
Vittorio Valli, Book review on:
Germany’s Economic Performance. From Unification to Euroization, Jens Holscher (editor),
Available online at http://eaces.liuc.it
335
notices that, despite the enormous net transfer from West Germany to former East
Germany (1200 billions of euros from unification to 2004) the economic performance
of East Germany was considerably worse than the performance of the other three
former communist countries. In 2004 East Germany’s real GDP had not yet
completely recovered the 1989 level, while it had increased by almost 25% in Western
Länder, by almost 42% in Poland, by over 13 % in Czech Republic and by almost
20% in Hungary. Also the unemployment rate had worsened more in East Germany
than in West Germany, Hungary and the Czech Republic.
Michael Kaser maintains that the poor performance of East Germany Länder was
partly due to the substantial revaluation of Eastern currency with the one-to one
conversion rate between the Eastern and Western currencies, while other Eastern
European countries had at first devalued, to the much higher unit labour cost, to the
probably excessive capacity closure in eastern Länder, etc. e finally concludes that
“..under conditions of high unemployment in the eastern Länder, and Poland, the
question needs to be posed as to whether ‘extensive’ policies favouring more
employment should take precedence over ‘intensive’ policies promoting labour
productivity..” (p. 237).
The concluding section consists in a paper by Norbert Walter on the prospects of
foreign direct investment inflows. The author maintains that the negative perception
on Germany’s economic perspectives prevailing till 2005 overlooked the positive
aspects, which he emphasizes. Germany had a good record on human capital, patents
and innovation, had a strong financial position for several firms, had a good transport
network, had recently introduced important reform policies, had a crucial position in
the relations with the new eastern members of the European Union, had low and
convenient housing prices, etc. Therefore, Norbert Walter, anticipating some of the
2006-7 events, gave a rather optimistic view of the German economic perspectives
and of its capabilities to attract foreign capital.
The book gives on the whole an interesting assessment of the debate on German
economy after reunification.
It does not, however, analyze in depth two crucial aspects of its recent trends, namely
the impact of globalization on its productive structure and the gradual, but persistent
loss in the comparative advantage in human capital which Germany had traditionally
held.
In particular too little consideration is given in the book on the outflows of direct
investment abroad. In the last two decades Germany has de-localized a growing and
substantial part of its production capacity to Eastern Europe and other emerging
countries. This has contributed to enhance total profits of German corporations,
compensations of managers and of top employees in headquarters, international
competitiveness and exports of German firms, but has contributed to reduce the
creation of internal medium and low- skilled jobs. This, together with the immigration
policy and the mistakes made, from the economic point of view, on the reunification
policies, only partly justified by political reasons, had contributed to determine high
levels of unemployment and an increase in wage inequalities. The semi-stagnation of
total wages has strongly contributed to explain the slow dynamics of aggregate
consumption and thus of internal demand and real GDP:
As regards human capital, Germany has kept up to now a relatively good level, but in
the last half century has gradually lost many positions, in per capita terms, if compared
with some other countries, such as the US, Japan, South Korea , Sweden, Finland, etc
EJCE, vol. 4, n. 2 (2007)
Available online at http://eaces.liuc.it
336
and has lost part of its former advantage vis-a -vis France, Italy, Spain, etc. In absolute
terms, moreover, it has less engineers, scientists and researchers than large emerging
countries such as China and India. Its dual system in education, with an early choice
of a substantial part of the young population towards vocational education, although
slightly revised, is good for chemistry and mechanical production, but is not adequate
for the more sophisticated high –tech sectors such as microelectronics and
telecommunication and for the more advanced tertiary sectors.
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