NCPA - National Center for Policy Analysis

How Germany Became the Savior of the Eurozone

June 4, 2013

Historically, Germany has been known as a northern European welfare state. Recently, however, perceptions of the country have changed; it is now perceived as the only economy that can keep Europe afloat during the euro crisis. The reforms that a center-left coalition put in place made the German economy more competitive. Rather than account deficits, the country now runs large account surpluses. The unemployment rate, which approached 10 percent in 2005, now approaches 5 percent, well below even the United States, says Mark Hallerberg, professor of public management and political economy at the Hertie School of Governance in Berlin.

The German economy began to grow when Chancellor Gerhard Schröder implemented the Hartz IV reforms.

  • It limited the full payment of unemployment compensation to one year from the previous duration of two years. Up to a cap, the German system paid a percentage of the previous wage, not a flat rate.
  • The unemployment payment dropped to around €350, with additional supplements possible for rent, heat and children. If one refused to accept a job, payments were cut a further 30 percent.
  • There were also "€1 jobs" created, where the state could employ someone at €1 an hour who was on benefits. In addition, there was also consideration of one's savings and the salary of one's spouse when calculating these benefits.

Separately in the 2000s, the government passed pension reforms.

  • In 2001, the German government moved the public pension system from a traditional pay-as you-go system to a multipillar one, with government subsidies for voluntary private contributions.
  • In 2004, the government linked pension adjustments to the number of contributors and recipients. This step theoretically will mean cuts in the future, assuming no change in policy.
  • In 2007, there was an agreement to increase the retirement age to 67 by 2029.

A third notable reform came into its own after the global financial crisis and is known by its German name, Kurzarbeit. This was a program where the state paid up to 70 percent of a person's salary up to a given cap, workers took a cut in hours and pay, and firms agreed not to lay off the worker.

These reforms changed the welfare system of Germany. The private sector also played its part in terms of restructuring and the use of new technology. Nevertheless, these reforms did contribute to a more competitive economy.

Source: Mark Hallerberg, "Challenges for the German Welfare State before and after the Global Financial Crisis," Cato Institute, Summer 2013.


Browse more articles on Economic Issues