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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

starke@sam.sdu.dk

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 Please do not quote without permission.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.