general » Germany – A Timid Economic Giant?

Germany - A Timid Economic Giant?
Refugees, Structural Imbalances and Germany's Current Account Surplus

DFID - UK Department for International Development / flickr.comDFID – UK Department for International Development / flickr.com

 

An economic discussion between:

Fabrizio Coricelli (Paris School of Economics and CEPR) and Andreas Wörgötter (Economics Research Unit, Institute of Statistics and Mathematical Methods in Economics, University of Technology, Vienna and IZA)

 

The Motivation

 

A significant part of the German electorate does not believe that the refugee wave constitutes a win-win (benevolent for the asylum seekers, beneficial for Germans) situation.

 

Actually, the overall economic situation is favorable. Is this the result of irrational xenophobia or can the concerns be linked to economic structure and economic policy settings?

 

If there is a labor market in Europe which could absorb refugees, then Germany is the prime candidate. The labor market is back to full employment, vacancies are increasing and wage growth is accelerating. The German labor market is strong, but is it ready for the large inflow of migrants?

 

Fig-1-20160141_BlogPost_26Sept2016-01

 

The Paradox: Germany looks like a timid economic giant

 

Germany is perceived as a strong economy and its high current account surplus is commonly interpreted as an indication of competitiveness and worldwide preferences for the high-quality of products made in Germany. Well-being indicators for most areas signal a high degree of satisfaction by the German population.

 

Fiscal balances are sustainable, not the least because of the high trust of financial markets in German government bonds, which are now sold at negative interest rates. However, satisfaction with parties ruling in local or federal coalitions is low and falling, while populist movements are gaining support, both in elections as well as, in voting intentions.

 

In particular, the attitude towards migrants and refugees is polarizing the country, which is puzzling given the overall good economic situation and the readiness of many employers to fill vacancies with newly arrived migrants. In this situation the inflow of young migrants should be perceived as a positive external impulse, which also improves the welfare of the incumbent labor force.

 

However, the rise of new, populist and anti-migration parties as well as the decline of mainstream parties indicate that standard models may not capture all aspects of the current situation in Germany.

 

The German success story in a nutshell

 

The reasons behind economic success in Germany rest on structural and institutional stability. The dual vocational education and training system favors early specialization and facilitates an efficient transition from school to jobs. The close collaboration with future employers increases the labor market relevance of acquired skills and regular workplace training reduces the adaptation period on the first job. Subsequent long tenure facilitates learning-on-the-job and incremental innovation. Public support for innovation is grant based, which favors existing firms with a track record of successful innovation projects. In addition, access to capital for investment is provided by local financial institutions, which know their clients and can use plant and equipment as collateral.

 

These structurally stable institutions help vertically integrated conglomerates to defend their competitive position on world markets through cost-saving productivity increases and customer-value-improving incremental innovations. Outsourcing helped, and the Eastern enlargement of the European Union provided ample opportunities. However, the industrial core of production remains in Germany.

 

As a consequence, Germany has a relatively big, export oriented manufacturing sector that produces a large trade account surplus while investment opportunities in Germany are held back by a scarcity of entrepreneurs implementing radical innovations. During the Great Recession, in contrast with other advanced economies, Germany even strengthened its position in export markets.

 

Fig-2-20160141_BlogPost_26Sept2016-01

 

The challenge of absorbing an additional labor supply

 

The integration of additional labor supply into these stable structures goes hand in hand with falling wages and/or increasing unemployment, which takes a long time to unwind. The labor market development during and after the Hartz reforms of the early 2000’s provide strong evidence for the validity of this relationship under the current framework conditions in Germany. Unemployment was increasing at the beginning of the reforms. Later on employment started to rise, together with a relative slowdown of wage increases and unemployment fell back to its pre-reform level. Wages, in particular at the lower end of the wage distribution, started to rise markedly only after the introduction of minimum wages.

 

Fig-3-20160141_BlogPost_26Sept2016-01

 

Integrating refugees with limited labor market skills into the structurally stable German labor market will require long and intensive interventions, starting with language courses, completion of general schooling requirements and successful participation in active labor market programs. Together with the needed social support, considerable additional fiscal efforts will be necessary, as past experiences of compensating skill-mismatches of migrants have not been particularly promising.

 

This may be why the refugees are perceived to increase the competitive pressure on already disadvantaged local low-productivity workers. Furthermore, it is likely that they will also crowd out domestic clients from public services. At least it will become more cumbersome to access public services for “old” and “new” clients alike. However, this is not what both sides expect as each group has the right to insist on support. Solving these conflicts requires political actions.

 

The way out: Business and equity friendly structural reforms

 

The European Commission considers Germany´s huge current account surplus to contribute to external imbalances. Structural reforms which help Germany´s domestic economy to become as vibrant and successful as its export sector would also most likely ease the integration of newly arriving migrants. Improving the financing conditions for start-ups could improve the chance to benefit from the newly arrived talent and skills. Encouraging entrepreneurship among migrants could facilitate the allocation of resources for new activities.

 

Within Germany´s existing structures the refugees are perceived as a humanitarian burden. With structural reforms they can become an asset. Policies make the difference.

 

 

References:

 

  • Coricelli, F., FR Ravasan and A. Wörgötter (2013), “The origins of the German current account surplus: Unbalanced productivity growth and structural change” Discussion Paper 9527, Centre for Economic Policy Research, London.
  • Coricelli, F. and A. Wörgötter  (2012), “Structural Change and the Current Account: The Case of Germany”, OECD Economics Department Working Papers, No. 940, OECD Publishing, Paris. DOI: http://doi.org/10.1787/5k9gsh6tpz0s-en
  • Hüfner, F., C. Klein and A. Wörgötter (2014), The German Labor Market in the Great Recession: Lessons for Other Countries. In J.Colombano and A.Shah “Learning from the World: New Ideas to Redevelop America”, Palgrave Macmillan UK, London.
  • Koske, I. and A. Wörgötter (2010), “Germany’s Growth Potential, Structural Reforms and Global Imbalances”, OECD Economics Department Working Papers, No. 780, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/5kmd7827ddzn-en

 

Sources for the Figures: OECD Economic Outlook Data Base, June 2016.