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Wunderkind or Average Guy? Germany’s Social Policy Response to the Financial Crisis
in Comparative Perspective
Peter Starke
Centre for Welfare State Research
University of Southern Denmark
Paper to be presented at the ECPR General Conference, Bordeaux, September 2013
First draft. Please do not quote without permission.
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Introduction
Germany’s development since the beginning of the Financial Crisis in 2008 is sometimes seen
as exceptional or even miraculous. This status as a Wunderkind of the crisis fits well with its
heightened political prominence in the struggle over the Eurozone crisis resolution in 2010
and 2011. In this paper, I will ask whether this status is justified in terms of economic
performance and policy trajectory, especially in the area of social policy. How can the
German response be characterized? Was this a typical response, given Germany’s economic
and political conditions, in the light of the existing literature? Through a detailed qualitative
analysis of crisis decisions and the economic and political dynamics underpinning these
decisions, I show that, while Germany’s economic performance was indeed exceptional,
especially with respect to the labor market, its social policy record was very much in line with
what we could expect on the basis of the theoretical and empirical literature on crisis
policymaking. The only exception is the role of social partners, which has been more
important in Germany than is commonly assumed in the current literature. The dependent
variable of this analysis are legislative changes in core welfare state schemes, including
pensions, passive and active labor market policies, family policies and health insurance,
which were taken in explicit response to the economic shock (or its economic repercussions).
This includes not only benefit changes but also changes in social contributions and eligibility
rules. The focus is on 1) whether welfare schemes were expanded or cut back and 2) the type
of change (e.g. the policy instruments used and the incremental or fundamental character of
changes).
The paper proceeds as follows. After a review of the emerging theoretical and
empirical literature on the question of crisis policymaking, I look at Germany’s economic
performance since 2007 in relation to a number of other OECD countries. I then turn to the
crisis responses. After a brief description of the political context, I give an overview of the
different stimulus packages, followed by a more detailed characterization of one of the central
crisis measures, that is, the expansion of short-time work. The final subsection of the
empirical part deals with the turn towards welfare state retrenchment in 2010, at the height of
the Eurozone crisis. The conclusion sums up Germany’s crisis response and interprets it
against the background of the literature.
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The Politics of Crisis Responses: Some Theories and Findings
How can we explain Germany’s particular policy choices in response to the Financial Crisis
and the Eurocrisis? There is a small, but quickly growing literature in political science dealing
with this question from a comparative angle (sometimes in relation to overall fiscal policy and
sometimes with a narrower focus on social policy per se). While much of it is empirically
driven and case-based, it is possible to distinguish several different theoretical approaches,
related to the classical approaches of comparative political economy and comparative welfare
state studies.
First, there is the commonsense explanation that the intensity – and perhaps also the
kind – of crisis responses vary with the depth of the crisis, measured, for example, in terms of
the change in GDP or unemployment post-2008. Most existing empirical accounts haven’t
found this to be the case (Armingeon, 2012; Bermeo and Pontusson, 2012a) – perhaps with
the exception of the handful of countries that had to be bailed out during the Eurocrisis. But
these have to be treated as a category of its own; here, responses have been more radical than
in other countries. Closely related is the question of fiscal room for maneuver at the onset of
the crisis. The idea is simply that countries with a fiscal surplus and/or a lower debt-to-GDP
ratio were better able to respond through discretionary stimulus measures. This has been
shown to be the case with respect to overall fiscal policy (Armingeon, 2012; Cameron, 2012).
Another issue is whether large or small countries have responded differently to the crisis.
However, Verdun, does not find any evidence that country size matters for policy responses
(to the Euro crisis) (Verdun, 2013).1
Studies of past social policy variation suggest that politics matter, in addition to the
social, economic and fiscal pressure that different governments are facing. Partisan politics
is, of course, the most dominant approach here, and some studies have analyzed whether a
relationship exists between the partisan composition of government and the crisis response.
The question is whether center-left governments have been more activist and expansionary in
the aftermath of the crisis than center-right governments. Most studies on the post-2008
1 See also the discussion in Starke et al. (2013).
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changes, however, either do not find a straightforward partisan effect (Armingeon, 2012;
Wagschal and Jäkel, 2010) or find effects that are conditional on context conditions such as
automatic stabilizers (Starke et al., forthcoming) or the underlying housing (finance) systems
(Ansell, 2012). Only few studies find partisan effects for some cases (Hörisch, 2013).
With regard to interest groups, there is little evidence that politics (in a looser sense of
the word) mattered, either. Some authors do not see a comparative pattern with regard to the
involvement of interest groups or the structure of interest group systems, especially compared
to the Oil Shocks of the 1970s. This time around, trade unions have been marginal in
domestic crisis decision-making, even in countries with corporatist legacies, these authors
claim (Baccaro et al., 2010; Glassner and Keune, 2012; Pontusson and Raess, 2012; Urban,
2012). In a study of France and Germany, for example, Schelkle finds that electoral politics
trumped a more traditional corporatist logic (2012).
Closely related to this is a strand of the literature that tries to understand crisis
responses from a regime perspective. One variant takes a Varieties of Capitalism perspective
(the theoretical groundwork is offered by Estevez-Abe et al., 2001; Iversen and Soskice,
2012), the other is based on welfare regimes. Both have in common that they see periods of
crisis as shaped by institutional legacies, perhaps even path dependencies which determine the
sort of instruments likely to be chosen and likely to work well in a given country. For
instance, Sacchi et al. argue that Continental European countries are more likely to employ
short-time work policies in response to unemployment crises, because high employment
protection levels make the alternative of external flexibility (i.e. layoffs) more costly and
since specific skill-investments provide strong incentives for employers to hoard labor (2011).
In this vein, a number of authors observe strong institutional continuity rather than
fundamental change (Blyth, 2013; Chung and Thewissen, 2011). In choosing instruments of
crisis management, there appears to be an empirical relationship with welfare regime type
(Starke et al., 2013). While there is a strong affinity of corporatist welfare states with
instruments of internal flexibility such as short-time work, we find increased training and
activation in response to crisis in some Nordic countries. Finally, the liberal English-speaking
countries – with the exception of Australia – after a sometimes brief flirt with counter-cyclical
expansion quickly turned towards welfare state retrenchment (Starke, 2013). Others, however,
find little evidence of regime effects. In her comparison of Germany and France, for example,
Schelkle points to a divergence between these two countries, despite similar structures
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(Schelkle, 2012).2
The ideational literature about the crisis has so far also focused on the puzzling lack of
fundamental change (Blyth, 2013). One of the central assumptions of many ideational
approaches is that crisis opens up windows to bring in new ideas and ultimately policy change
(e.g. via processes of policy learning) (Campbell, 2002). There is an ongoing debate over the
question why no paradigm change occurred after 2008 (Blyth, 2013). Another, more specific,
ideational account is Vail’s analysis of German and French crisis responses. He argues that,
while Germany had a larger stimulus than France – which, at first sight, contradicts the notion
of a French ‘statist’ economic policy – its composition was heavily shaped by policy ideas
(Vail, forthcoming). According to Vail, German policymakers only hesitantly applied
Keynesian recipes and, influenced by ordoliberal thinking, emphasized strongly targeted tax
cuts and subsidies over ‘macro’ deficit-spending.
Lastly, there is an emerging literature on the impact of external actors (EU
Commission, ECB, IMF) on domestic crisis responses. In countries that were bailed out,
‘domestic politics, either party- or interest group-based, has no effect on the selection of the
policy response’ (Armingeon and Baccaro, 2012: 188). This, however, applies to a handful of
countries in the European periphery (Greece, Ireland, Portugal, Cyprus). To be sure, there is a
gray area and several core countries, including Italy, Belgium and France, have come under
increased attention of financial markets since beginning of the European debt crisis, due to
issues of fiscal management and competitiveness. However, so far at least, the majority of
countries have chosen their crisis responses in an autonomous way, and the large variety of
crisis responses (Bermeo and Pontusson, 2012b; Farnsworth and Irving, 2012; Starke et al.,
2013) suggests that autonomy has been considerable, despite strong economic pressure.
The existing literature will serve as a guide for the subsequent analysis of Germany.
The case study is not intended to be a ‘test’ of existing theories, but these theories and
findings help to better situate the German case in the universe of countries and lead to an
answer to the question of how typical or unusual the German experience in the aftermath of
the crisis has been.
2 Other critics of the Varieties of Capitalism perspective emphasize the differences in Germany’s labor market performance in previous recessions (Reisenbichler and Morgan, 2012).
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German economic performance after the 2008 financial crisis
Germany’s economic performance since 2008 has been remarkable, especially for a country
that had been portrayed as the sick man of Europe only a few years previously (Reisenbichler
and Morgan, 2012). When just looking at some of the central economic indicators, the
exceptional speed of economic recovery becomes visible. The emphasis here is on recovery,
as Germany was by no means spared from the initial shock in 2008-2009. Economic growth
took a deep plunge in 2009, with an annual growth rate of -5.1 per cent (see figure 1). This
was a more pronounced contraction compared to the average Euro member country, to the
United States and – perhaps ironically – even to Greece. However, the speed of Germany’s
return to growth in 2010 was spectacular and the country was also spared from the ‘double-
dip’ recession many European countries had gone through by 2012. Yet Germany was by no
means spared from the financial repercussions of the US subprime crisis. On the contrary,
many German banks, including some of the state-led Landesbanken, were standing up to their
necks in toxic assets and a number of institutions had to be bailed out by the government.
Although, with hindsight, many reasons can surely be found, it is important to stress how
surprising this growth performance was when it actually happened. In its 2010 Economic
Survey of Germany, the OECD still projected a much slower recovery for 2010 and 2011
(OECD, 2010: 25-6).
Figure 1 (growth) about here
The positive post-crisis trajectory of economic growth is reflected in other indicators as well.
Developments on the German labor market, in particular, compare favorably with other
countries (see figure 2). The German unemployment rate barely ticked upwards in 2009 and
moved downwards in the years since. It may, according to OECD projections, even fall below
5 per cent in 2014 (in terms of the OECD indicator). All this happened during a period when
unemployment in most other European countries kept on growing.
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Figure 2 (unemployment) about here
Public finances, too, have improved markedly (see figures 3 and 4). After a high deficit in
2010, Germany is firmly on the path of consolidation and a (small) surplus was reached for
the year 2012. (Recently, Germany seems to even have surpassed Sweden in this respect,
another country with comparatively sound fiscal stance post-2008). Public debt in percentage
of GDP is quite high, but this is to a large extent also due to a legacy of high indebtedness
rather than the financial crisis. Overall, Germany’s fiscal room for maneuver at the onset of
the crisis was moderately large, given that, for the first time in years, the budget was in
surplus in 2007. However, overall government debt was still above the 60 per cent
‘Maastricht’ benchmark, even before 2008. Against this background, it was reasonable to
expect some countercyclical spending, but not an extremely large package.
Figure 3 (deficit) about here
Figure 4 (gross debt) about here
What is not to like, one might ask. There have been warnings that the German recovery, while
real, has overly relied on a lopsided – and perhaps unsustainable – economic strategy, with
excessive reliance on the high value-added export sector. The high German current account
surplus had led to an unbalanced situation in the run-up to the crisis, according to critics
(Rajan, 2010). Although the IMF and other organizations regularly call for a policy change
and a strengthening of German domestic demand to address the trade surplus – currently
around 6 per cent of GDP – there are few signs that the overall export-led strategy might
change in the near future. Indeed, the German policies since 2008 have, if anything,
reinforced the export bias.
To sum up, the German status as a ‘Wunderkind’ applies particularly to the extremely
favorable labor market performance – despite a drop in GDP of more than 5 per cent in 2009.
The ‘jobs miracle’ (Krugman, 2009) is often traced back to the German growth model and the
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particular structure of the German labor market (Reisenbichler and Morgan, 2012) as well as
to some of the policy responses in 2009/2010. It is to these policies that I will now turn.
Social policy responses
The political context
When the crisis hit in 2008, Germany was governed – only for the second time since the
Second World War – by a grand coalition of Christian Democrats (CDU/CSU) and the Social
Democrats (SPD), under the Chancellorship of Angela Merkel. The 2005 federal election had
not led to a clear majority of either the centre-right alliance – the CDU/CSU and their
preferred ally, the market-liberal FDP gained only 45 per cent of the vote3 – or the red-green
block – with 42.3 per cent for the SPD and Bündnis 90/Die Grünen (Green Party) combined.
The grand coalition was thus an unplanned and pragmatic alliance of two opponents and
many commentators predicted new elections before the end of the regular four-year term
(Egle and Zohlnhöfer, 2010). This did not happen. In the 2009 election, the SPD incurred
large losses and went into opposition. Merkel survived the financial crisis politically and
continued as Chancellor after the 2009 election, albeit not without a (small) reduction in the
votes for her party. The FDP, by contrast, did remarkably well in 2009, gained 14.6 per cent
of the party vote and secured the majority for a center-right coalition, after 11 years out of
office. Hence, in terms of the partisan composition of government, there are two sub-periods
to consider: The grand coalition up to late October 2009 and the CDU/CSU-FDP alliance
afterwards.4
3 Share of the party-list vote (Zweitstimmen). 4 The change in government also roughly coincides with the beginning of the Eurocrisis or European sovereign debt crisis. While this paper looks at Germany’s domestic responses to the different phases of the crisis, it does not deal with its role at the EU level in resolving the Eurozone debt crisis (see Schelkle, 2012).
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The stimulus packages (2008-2009)
As in other large welfare states, the immediate response to the recession in Germany was
automatic, through the built-in buffers of the welfare state (Darby and Melitz, 2008; in’t Veld
et al., 2012). Germany’s fiscal stabilizers are relatively large by international standards (see
Table 1). A common measure is fiscal elasticity, such as Girouard and André’s semi-elasticity
indicator, which measures the change of the budget balance, as a per cent of GDP, for a one
per cent change in GDP (2005: 22). As automatic stabilizers work through a number of public
spending schemes, most notably unemployment benefits, but also other social spending
schemes (Darby and Melitz, 2008), the semi-elasticity of the budget is closely related to
indicators such as public social expenditure as a percentage of GDP and the replacement rate
of unemployment. Despite cutbacks of long-term unemployment benefit rates in the years
prior to the crisis – the Hartz IV reforms – benefits for short-term unemployment for core
workers remain relatively high by international standards. Simulation-based estimates of the
multiplier effect of automatic stabilizers across 20 countries reveal that Germany has the third
highest stabilization effect in case of an income shock (behind Denmark and Belgium) (Dolls
et al., 2012).
Table 1 (automatic stabilizers) about here
We would expect this to have had an influence on the size of the fiscal stimulus in 2008-2009.
Larger automatic stabilizers should reduce the need for a discretionary response. It turns out,
however, that the size of Germany’s short-term fiscal stimulus of about 3 per cent of GDP –
according to the OECD figures, which take both implemented and announced measures into
account – was well above the OECD average (see Table 2).5 Moreover, it was relatively
evenly made up of revenue and spending-side measures. The OECD data also shows (not
reported in table) that Germany’s stimulus started only in 2009 – some countries had been
5 The government itself put the sum total of all stimulus measures at 4 per cent of GDP (Bundesministerium für Wirtschaft und Technologie, n.d.).
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able to infuse some money as early as in late 2008 – and was spread almost equally over the
years 2009 and 2010.6
Table 2 (stimulus) about here
The stimulus came in four main packages (see Table 3). The first was simply called Relief
Package (Entlastungspaket) and announced on 7 October 2008. It was followed by the two
prime crisis management packages: the so-called Stimulus Package I (Konjunkturpaket I)7,
announced on 5 November 2008 and the Stimulus Package II (Konjunkturpaket II)8 of 13
January 2009, which was also the largest. Finally, a small additional package, the so-called
‘Growth Acceleration Law’ (Wachstumsbeschleunigungsgesetz) was announced in November
2009. The first three measures were enacted by the grand coalition and the fourth by the
newly-elected centre-right government.
Table 3 (German packages) about here
The Entlastungspaket of October 2008 is sometimes simply counted as part of the
Konjunkturpaket I which was announced about a month later (Illing, 2013: 57). The
government increased benefits and lowered taxes and contributions, but some of the measures
had already been on the agenda and were only brought forward in time. Yet given the
beginning economic turmoil, the government was keen to show that it was not just rescuing
the banks – through the Financial Stabilization Act, legislated in the same month – but also
6 These figures have to be taken with a grain of salt as they are primarily based on announced, not actual extra spending and tax cuts. 7 Officially, the name was ‘Beschäftigungssicherung durch Wachstumsstärkung’, which roughly translates to ‘Securing Jobs by Strengthening Growth’. It was enacted by the Bundestag on 4 December and by the second chamber on 5 December 2008. 8 Its official name was ‘Pakt für Beschäftigung und Stabilität in Deutschland zur Sicherung der Arbeitsplätze, Stärkung der Wachstumskräfte und Modernisierung des Landes’ (‘Pact for Employment and Stability in Germany to Secure Jobs, Strengthen Growth Potential and Modernize the Country’). It was split into four separate laws, which were enacted on 13 February 2009 by the Bundestag and on 20 February 2009 by the Bundesrat.
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the ‘real economy’, especially households. The package brought together a number of
revenue-side measures, including a better deductibility of voluntary social insurance
contribution and tax relief for families. This also included benefits for those who receive the
child benefit not through income tax allowances but through transfers: The benefit was raised
by 10 Euros for the first and second child and 16 Euros for the third and every further child.
Contributions to unemployment insurance were lowered by 0.5 points to 2.8 per cent.
Contribution rates had been lowered already before the crisis, but against a completely
different background: The reason then had been the relatively good labor market situation and
falling benefit expenditure, not the need to get the economy back on its feet. Housing benefit
increases were introduced 3 months earlier than planned.
By November, it had become clear that the real economy would be seriously affected
by the fallout from the financial crisis. The Konjunkturpaket I centered on tax cuts for
businesses, tax deductions for the modernization of buildings (especially in terms of energy
efficiency) and for personal services as well as on public investments in infrastructure
(especially transport). In the social policy field, the most important measures were the
extension of maximum receipt of short-time work benefits to 18 months (see below) and
additional expenditure on (already existing) training schemes for older and low-skilled
employees (the ‘WeGebAU’ program) as well as on 1,000 new caseworkers for the
unemployed.
The first stimulus packages were seen by many as overly cautious and insufficient –
not least by the government’s own council of economic advisers (Sachverständigenrat, 2008).
While the social policy measures received support, they were also seen as lacking in ambition.
For instance, in its annual review, the council described the number of 1,000 additional
caseworkers as ‘cute’ ("einigermaßen putzig", Sachverständigenrat, 2008: 260). The same
sentiment was dominant among the social partners. In a series of meetings with members of
the government in December 2008 (Eichhorst and Weishaupt, 2013: 12-13), trade unions,
employers as well as managers of the largest German companies tried to convince the
government to do more and enact another stimulus package with a clearer labor market focus.
The Konjunkturpaket II, i.e. the third stimulus program, was a clear response to these
calls. Before agreeing on a package, the coalition partners were publicly fighting about the
most central measures. While the SPD called for lower social contributions – health insurance
contributions in particular, which had just been raised to 15.5 per cent across the board a few
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months earlier – the Christian Democrats favored tax cuts. Eventually they did both.
The package was unveiled in the early hours of 13 January 2009, after a nighttime
meeting of the coalition partners. It reflected the interests of the German export industry and
the trade unions in these sectors. The two most debated components were a large car-
scrapping scheme and the expansion of short-time work. But the package also contained
public investment spending of 14 billion Euros, especially in kindergarten, school and
university buildings, hospitals and urban infrastructure, as well as a credit package for small
and medium enterprises. The famous car-scrapping scheme consisted of a lump sum of 2,500
Euros for a purchase of a new car (if it replaced an older car). The scheme had been proposed
by the German car industry – in tandem with the trade unions (Eichhorst and Weishaupt,
2013: 12) – and was swiftly taken up by policymakers. It came on top of a tax relief for new
cars, which had been introduced in the first stimulus package. 1.5 billion Euros were set aside
at first, but the volume was increased to a total of 5 billion later on.
In the area of social policy, the focus was again on short-time work. The short-time
work measures consisted of an additional subsidization of employers (described in more detail
below). Almost 2 billion Euros were devoted to additional active labor market measures and
5,000 employees (in case management and administration) were to be added to the job
centers. Low-income families with children received a so-called Kinderbonus lump-sum
payment of 100 Euros. The benefit rate for children of long-term unemployed was raised from
60 to 70 per cent of the adult rate. Contributions to health insurance fund were decreased by
0.6 points to 14.9 per cent (Schmidt, 2010). In contrast to unemployment insurance, the
decreasing health insurance contribution rate represented a reversal of earlier developments.
Interestingly, the government also announced to introduce the so-called debt brake
(Schuldenbremse), a constitutional provision aiming at long-term debt reduction (Schelkle,
2012: 136). The debt brake institutionalizes a highly fiscally conservative policy not just at
the federal level, but also (and particularly) at the sub-national Länder level. With its two-
third majority in both houses of the legislature, the grand coalition was thereby able to
implement a strongly fiscally conservative provision at the same time as it expanded
countercyclical spending. This emphasized the exceptional character of deficit-financed
spending in 2009.
Shortly after the change in office, there was a fourth stimulus package, the Growth
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Acceleration Act (Wachstumsbeschleunigungsgesetz) of November 2009, which stands in a
much looser relationship to the crisis. With a volume of merely 6 billion Euros, it was also
considerably smaller. The only measure that can be seen as social policy related was another
rise in the child benefit and the associated child tax allowance. This was also the fiscally most
important measure. Yet in the public debate, the small, but very concentrated consumption tax
relief for hotels attracted most of the attention as it was seen as a blatantly clientelistic move.
Across all four packages, social policy had a significant share. The government states
that all packages together had a volume of 100 billion Euros over two years (this includes
some tax measures not included in Table 3), 51.6 per cent of which were devoted to social
policy measures (calculation based on Bundesministerium für Wirtschaft und Technologie,
n.d.).9 In other words, the German government did not simply rely on automatic stabilization
alone, but actively used the welfare state as an instrument of crisis management. One of the
most important tools – not in terms of fiscal volume but rather in terms of the positive effects
associated with it – was short-time work.
Short-time work: The flagship of the German crisis response
Short-time work was the ‘flagship’ (Schelkle, 2012: 137) of the German crisis response. The
instrument of short-time work (Kurzarbeit) and the accompanying cash benefit
(Kurzarbeitergeld) was not new but had been in place in Germany since the 1920s (with roots
going back before the First World War) (Brenke et al., 2013: 289-90). It was extensively used
in previous economic crisis periods such as the two Oil Shocks in the 1970s and in order to
buffer the massive shock to the labor market in East Germany after reunification in the early
1990s (Bogedan, 2010). Cyclical short-time work10 allows for a reduction of working time of
all or a part of the employees in a company and partly compensates for ensuing loss of
income (for a comparative perspective, see Hijzen and Venn, 2011; Sacchi et al., 2011). The
working time reduction can vary and it is even possible to reduce it to zero hours for some
9 This percentage share includes also revenue measures such as lowering contributions and higher child tax allowances, but it excludes the longer entitlement period for short-time work benefits as the data is not available. 10 During recessions, the instrument of cyclical short-time work (Konjunkturelle Kurzarbeit) is used. There are additional specific instruments for seasonal labor market fluctuations (Saisonale Kurzarbeit) as well as a scheme for companies undergoing restructuring (Transferkurzarbeit).
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time. This buys employers some time to limit production in the face of a sudden lack in
demand while avoiding mass layoffs. In the German case, short-time work was seen as a
particularly suitable instrument for many employers – especially in the manufacturing sector –
as it secured continuity of employment for workers with sector or firm-specific skills in the
face of rapid population ageing and the prospect of future skills shortages (Möller, 2010).11 In
general, employees receive 60 per cent of the difference between their previous net wage and
the reduced wage during short-time work from the Federal Employment Agency. As in the
case of regular unemployment insurance, the compensation is 67 per cent for employees with
children. The benefit has a time-limit of 6 months which can be extended to up to 24 months
by decree, depending on the overall situation on the labor market.
As an instrument of crisis management, short-time work was not just used but actively
expanded in response to the crisis.12 In a series of meetings with members of the government
in December 2008 (Eichhorst and Weishaupt, 2013: 12-13), trade unions, employers as well
as managers of the largest German companies tried to convince the government to do more
and enact a second stimulus package with a clearer labor market focus – in contrast to the first
packages in 2008 which had consisted mostly of tax cuts. The resulting Konjunkturpaket II of
January 2009 reflected the interests of the German export industry and the trade unions in
these sectors.
First, the maximum entitlement period of short-time work benefits was extended (by
ministerial decree) from 12 to 18 months, and then to the upper limit of 24 months for those
applying in 2009 (Brenke et al., 2013: 293).13 (It was subsequently reduced again.) Eichhorst
and Marx suggest that electoral considerations in the run up to the 2009 federal elections may
have played a role in the decision to expand the period to 24 months (2009: 232). However, it
was also a response to a high-level meeting with employers and trade unions in April 2009
(Eichhorst and Weishaupt, 2013: 14).
11 What is more, Reisenbichler and Morgan point out that the sectors hit the worst during the crisis – broadly, the export-oriented parts of the German economy – had been growing fast in the years predating the crisis. It was hence rational, at least up to a point, to hoard skilled labor and wait until the situation improved (2012: 566). 12 This is also in line with earlier crises. In the 1970s, for example, the rules regulating short-time work were eased significantly (Bogedan, 2010: 581). 13 In connection to this, some eligibility rules were eased. It is legally required, for example, that at least a third of the employees in a company are affected by salary cuts of more than 10 per cent, before the company can apply for STW. This stipulation was temporarily revoked until the end of 2011.
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Second, the state took on a larger share of the cost of short-time work by lowering
social contributions of employers. This was again decided by the coalition partners as part of
the Konjunkturpaket II. It is legally required that employers pay social contributions (for
health, long-term care and pension insurance) during times of short-time work, in order to
avoid shortfalls in individual contributory records, especially for pensions. The contributions
are based on a notional wage or normally 80 per cent (regardless of the actual reduction of
working time). The government decided to compensate employers for at least 50 per cent of
these contributions – up to 100 per cent when employees were offered further training while
on short-time work. The latter was a policy innovation that went beyond a mere expansion of
the existing instrument (Eichhorst and Marx, 2009). There is evidence, however, that
relatively little use was made of this possibility (see Brenke et al., 2013: 292).
The policy changes between 2008 and 2010 made short-time work an attractive option
for many companies. At the peak in May 2009, almost 1.5 million employees or 5.1 per cent
of all German employees received short-time work benefits, most of them in the Western
parts of Germany, especially in regions with export-oriented manufacturing firms (Brenke et
al., 2013). Employees in the manufacturing sector (and construction) are heavily
overrepresented in the group of short-term workers, when taking the share of manufacturing
employees in the total labor force into account (Brenke et al., 2010; Crimmann et al., 2012;
Eichhorst and Marx, 2009).
There was almost unanimous support across parties and among academic observers for
the use of short-time work (Krause and Uhlig, 2012). Criticism was only voiced in relation to
some issues, such as the risk that, when used for a longer period of time, it may keep
companies in need of restructuring from doing so, the bias towards subsidizing ‘typical’ and
male workers (e.g. Eichhorst and Marx, 2009).
Short-time work was certainly one cause of the German ‘job miracle’. But it was not
the only reason why employment rates remained stable. While employment protection of core
workers is still high in Germany, internal flexibilization has increased in recent decades.
Notably the practice of long-term working time accounts (Arbeitszeitkonten) has become
widespread, especially in the manufacturing sector. They allow to decrease or increase hours
in line with demand on an individual basis. By 2005, 48 per cent of all employees were
subject to a working time account (Burda and Hunt, 2011: 18). Their extensive use is why
some authors see short-time work as one element among several that buffered the fall in
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demand during the crisis and helped to avoid massive layoffs. Many employees had time
surpluses on their accounts, which allowed for a smooth reduction in working time in 2009
(Burda and Hunt, 2011).14 The German jobs miracle is thus only partly a result of specific
policy decisions taken in 2008-2010 (Reisenbichler and Morgan, 2012).
The Eurozone crisis (2010-2013): A turn towards retrenchment
The European sovereign debt crisis or Eurozone crisis began in December 2009, when Greek
government bonds were downgraded. In the months that followed, more countries were drawn
into the danger zone and European governments, in accord with the ECB, the EU
Commission and the IMF, had to intervene to prevent a bail-out. The story of the rescue
packages for Ireland, Greece and Portugal cannot be described in detail here. Suffice to say
that a great deal of uncertainty and urgency marked the years 2010 and 2011 and that the
Eurozone crisis came to dominate the debate in the core countries, Germany in particular.
Germany itself, however, also changed course radically in 2010, at least for a while.
Against the background of the Eurozone crisis and the coming into effect of the new
constitutional debt brake (fully effective by 2016), the government announced the
‘Zukunftspaket’ (Future Package), the largest package of expenditure cuts in German history,
after difficult negotiations between the governing CDU/CSU and FDP (Bundesregierung,
2010). It was worth 80 billion Euros of cutbacks over 4 years (2011-2014). In addition to
measures like cuts in subsidies, reductions in military personnel and a vague promise of a
financial transaction tax, the package included welfare state retrenchment of significant
proportions. Parental leave benefits were moderately cut back (from 67 to 65 per cent of
previous wages) for higher-income earners, but entirely abolished for the long-term
unemployed. The long-term unemployed – that is, the recipients of ‘Unemployment Benefit
2’ – were also to lose certain discretionary benefits. Moreover, both the provision that the
state paid pension contributions during their time of unemployment as well as a transition
supplement (for those whose earnings-related unemployment benefits expire) were abolished.
14 Burda and Hunt also cite German employers’ reticence to hire during the pre-2008 upswing as well as long-term wage moderation as further factors behind the jobs miracle (2011).
17
Overall, 30.3 billion of the 80 billion in planned expenditure cuts fell within the area
of social policy (Bundesregierung, 2010: Appendix). The long-term unemployed were the
worst-affected group, which was particularly criticized by the opposition. What is more, the
government turned out to be more keen on implementing welfare state retrenchment than
other expenditure cutbacks that were part of the Future Package. An independent institute
calculated that in 2011, the government had only generated 42 per cent of the total planned
savings of 11 billion Euros for that year. The welfare cutbacks, by contrast, had been swiftly
implemented (‘Schäubles Spardefizite’, Frankfurter Rundschau, 13 March 2012).
Gradually, with ever-improving economic performance, the crisis faded from view, at
least in terms of domestic politics. By late 2012, the government had finally returned to
‘normal politics’. The main social policy debate revolved around the Betreuungsgeld (Care
Benefit), a home care allowance reserved for parents not using public childcare facilities. It
was introduced as a measure to improve ‘choice’ for families, but heavily criticized by the
center-left opposition parties as a waste of money, driven by ideology and electoral politics.
Conclusion
The German social policy response to the Financial Crisis of 2008 was mostly revenue-side
oriented expansion, in combination with amendments to the short-time work scheme that
benefited the country’s export-oriented companies. Benefits increases were rather rare, with
the exception of benefits for children in low-income households. This was not, however,
‘Keynesianism by stealth’ nor was it particularly ordoliberal in nature, as Vail has claimed
(Vail, forthcoming). First, with between 3 and 4 per cent of GDP, the stimulus was large,
even by international standards. Second, while some elements may have been less effective,
this does not make it less Keynesian, as Vail effectively argues. Third, looking at the all the
elements of the stimulus packages, it becomes clear that public investment, business credits,
broad income tax cuts and many other measures were included, which do not in any way,
followed an ‘ordoliberal’ blueprint. If anything, ordoliberal thinking would have warned
against heavily subsidizing particular industries (such as the German car industry) and thereby
risking to distort competition and support uncompetitive businesses.
How can the German response be interpreted, in light of both the comparative
18
tables and the theoretical literature discussed earlier? Was it an unusual case or rather an
‘average guy’? It turns out that the German response is very much in line with what we would
have expected from a theoretical point of view.
First, according to most studies, the depth of the crisis is only a weak guide to what
countries are doing. Germany was hit hard in 2009, but found a way to respond that fit well
with the structure of the labor market and the strength of the export industry, which led to a
shortcut to recovery. (Germany was also lucky to face continuously high demand for German
manufacturing goods from middle-income countries that experienced a relatively ‘good
crisis’.) The state of public finances allowed for a moderately large stimulus package, and the
government made ample use of that room for maneuver while keeping with long-term fiscal
consolidation goals (emphasized through the constitutional debt brake).
There is no clear evidence in the literature that partisan politics mattered for crisis
responses. If anything, the impact was contingent on other factors. The politics of German
crisis response were relatively consensual in Germany. Political conflict between CDU/CSU
and SPD was mainly about whether to focus on tax reductions or on reductions in social
security contributions. There is little evidence of partisan conflict around the issue of short-
time work, however (Bogedan, 2010). Moreover, the social policy of the grand coalition had
already been expansionary before 2008 (Schmidt, 2010). In spite of stalemate, the two parties
had opted for selective expansion, which can be explained by the move to the left of the
CDU/CSU since the market-liberal election program of 2005. Yet when the liberal FDP
entered government in 2009, we find that government activism with respect to short-time
work slowed down somewhat. But it is hard to say whether this had more to do with the
partisan shift than with the end of the immediate domestic economic crisis and the impact of
the Eurozone crisis which in Germany was widely interpreted as a crisis of public debt. The
shift to the right is visible in the size and shape of the expenditure cutbacks announced in
2010, which were heavily targeted on welfare measures and legitimized with standard
arguments about work incentives.
The lack of partisan conflicts in 2008-2009 probably had also to do with the strong
agreement between the social partners on the issue of crisis responses. At first sight, the
German response was not corporatist in the classical sense: There was never a formal
corporatist agreement or ‘social pact’ where each side made concessions (Schroeder, 2010). It
was rather that the social partners – especially those representing German export industries –
19
lobbied the government for specific transfers and temporary regulatory changes and met in
relatively informal meetings to discuss these matters with the government.15 In fact, the social
partners seemed to have pushed the reluctant coalition to significantly expand the stimulus
through the short-time work scheme (and the car-scrapping programme). This squarely
contradicts Schelkle’s account of Germany, who downplays interest group politics in favor of
an electoral logic (2012). Overall, especially compared to the period during the previous ‘red-
green’ government between about 2001 and 2005, the relationship between trade unions and
the government and between the social partners themselves had improved markedly
(Schroeder, 2010).
The crisis did not lead to – and was not intentionally used for – any fundamental
changes of the German welfare state. Changes took place at the level of entitlements,
eligibility criteria and contribution rates, but did not touch the overall logic of the system.
Sacchi et al., however, regard the relaxation of eligibility and the expansion of public
subsidies as ‘path-breaking’ (2011: 484). Likewise, the introduction of incentives for
qualification in the system of short-time work was innovative, as it added a dash of social
investment to this policy instrument. However, qualification during short-time work was
voluntary and remained marginal. Moreover, all these changes were introduced in a
temporary manner and were not intended to permanently change the German welfare state.
The welfare state cutbacks of 2010 also essentially continued the workfare trajectory of the
early 2000s and did not introduce a new logic into the system. The lack of fundamental
change is in line with what can loosely be called a ‘regime approach’.
To sum up, while Germany’s economic performance seemed miraculous to many
observers, the government’s crisis response was very much in line with trends across
countries. Germany was not a deviant case or ‘Wunderkind’ but did what could have been
expected, given its fiscal starting point and the institutional structure of the German welfare
state. The only exception to this ‘average guy’ status is the role of the social partners,
especially employers and trade unions in export-oriented sectors. Their activism in 2008 and
15 Moreover, worker representatives were involved at the company level – since works councils need to agree when applying for short-time work – and at the level of collective agreements. In many sectors, there are supplementary regulations on short-time work as part of collective agreements, including supplementary benefits and special employment protections (for an overview, see Bispinck and WSI-Tarifarchiv, 2010). In some sectors, such clauses were expanded in collective agreements in 2009 and 2010.
20
2009 goes against a literature claiming that the Financial Crisis was no time for old
corporatism.
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Figure 1: Annual economic growth in per cent, 2007-2014, selected countries
Source: OECD Economic Outlook Database (OECD).
Note: Projections for 2013 and 2014.
24
Figure 2: Unemployment rates in per cent, selected countries, 2007--2014
Source: OECD Economic Outlook Database (OECD).
Note: Projections for 2013 and 2014.
25
Figure 3: General government financial balance, as a percentage of GDP, selected countries, 2007-2014
Source: OECD Economic Outlook Database (OECD).
Note: Projections for 2013 and 2014.
26
Figure 4: General government gross financial liabilities as a percentage of GDP, selected countries, 2007--2014
Source: OECD Economic Outlook Database (OECD).
Note: Projections for 2013 and 2014.
27
Table 1: Size of automatic stabilizers, selected countries
Semi-elasticity of budget Social expenditure in per cent of GDP
Unemployment replacement rate (single) in per cent of APW wage
France .53 29.8 70.7
Germany .51 25.2 60.0
Greece .47 22.2 48.4
Sweden .55 27.5 64.1
United Kingdom .45 21.8 16.6
United States .34 17.0 58.2
Euro area .48 - -
Source: Girouard and André (2005), OECD (2013b),Scruggs (2013).
Notes: Semi-elasticity is defined as the change of the budget balance, as a per cent of GDP; for a one per cent change in GDP, the figures are based on 2003 data; social expenditure data and replacement rates are 2008 figures.
28
Table 2: Size of discretionary fiscal stimulus, selected countries, 2008-2010 net effect of measures on fiscal balance, in per cent of GDP
Spending Tax revenue Total
France -0.4 -0.2 -0.6
Germany -1.4 -1.6 -3.0
Greece - - -
Sweden -0.9 -1.8 -2.8
United Kingdom 0.0 -1.5 -1.4
United States -2.4 -3.2 -5.6
OECD average (unweighted)
-0.7 -1.2 -2.0
Source: OECD, OECD Economic Outlook, Interim Report March 2009 (2009: 110).
29
Table 3: Crisis measures in Germany, 2008-2011
Date of announcement
Package Volume spent in 2009 and 2010 (in Euros and per cent of annual GDP)
Social policy measures as part of the packages
7 October 2008 Entlastungspaket (Relief Package)
21 billion Lowering of unemployment insurance contributions, increase in child tax allowance and child benefit, tax deductions for health insurance contributions
5 November 2008 Konjunkturpaket I (Stimulus Package I)
11 billion Extension of short-time work period to 18 months, spending on training schemes, 1,000 new unemployment case workers
12 January 2009 Konjunkturpaket II (Stimulus Package II)
51 billion Refund of employer social contributions during periods of short-time work (50% and 100% if employees participated in training)*, lowering of health insurance contributions, 100 Euro child bonus, higher benefits for children of unemployed
9 November 2009 Wachstums-beschleunigungsgesetz (Growth Acceleration Act)
6 billion Higher child tax allowance and child benefit
7 June 2010 ‘Zukunftspaket’ (Future Package)
-82 billion (over 4 years)**
Cutbacks in discretionary benefits and parental leave benefits for unemployed, pension contributions for unemployed, transitional supplement; lower parental leave rate for higher-income families
Source: author’s compilation, based on various official government announcements and Bundesministerium für Wirtschaft und Technologie (n.d.).
Notes: *The extension of the maximum period of short-time work to 24 months was introduced by decree in May 2009 for all applications during that year. **Note that this figure must be treated with extreme caution. It is an estimate made in 2010 and includes a number of measures that were, in fact, never implemented.