Labour is trying to learn from Germany’s economy, but they are ducking the difficult reforms
Joe Wright, 30 April 2014
The Labour frontbench (and many others) have been looking to Germany for ways to nudge Britain’s economy toward manufacturing and exports, but if they look closer, they will find the root of that success rather jars with Ed Miliband’s brand of politics.
The robust Mittelstand is widely credited with Germany’s rise in Europe, especially in the face of East Asian competition which has eroded the industrial base of most Western economies. This group of family-owned factories have gone from strength to strength through:
- Avoiding debt (even if it means slower growth)
- Specialising in niche markets
- Developing product-related services
- Investing in vocational training (e.g. combining classroom instruction with work experience)
They have also stuck together, refusing to outsource jobs. This has allowed them to maintain strict production control to service other Mittelstand companies as rapidly as possible, meaning a more competitive base altogether (detailed in this Economist article). They have also created complex value-added chains, where companies adapt each other’s products for different markets.
But the reform of the German labour market also played a large part in manufacturing this economic machine. The Default Line by Channel 4 News’ Faisal Islam (pp. 298-324) contains some considerable home truths for politicians who idealise the ‘co-ordinated’ German economy. Aside from the aspects that Labour admire and are adopting in policy, such as the Sparkassen regional banks which provide a secure and patient flow of cash to businesses. The roots of the German comeback were under Gerhard Schroeder’s tenure in the 1990s and his forcing into place of the very unpopular Hartz IV plan.These reforms recommended substantial cuts to welfare and a liberalisation of the workforce – including those much-loathed temporary contracts we hear so much about (‘zero hours’). It included a major overhaul of the welfare system which, in the words of The Economist, ‘reduced unemployment benefits and liberalised temporary work. Benefits thought to be sacrosanct were cut. Income inequality rose. But so did employment’. Upon entering office in 2005, Merkel later raised the pension age from 65 to 67.
Many of these policies were unpopular and remain so. More familiarly to UK politics, German critics say that unemployment figures are inaccurate in how they measure all employment instead of long-term and short-term. Nevertheless, the added flexibility provides breathing space for German industry. The debate remains, but what is better? No job or low-paid insecure work?
If Labour wants to reproduce the same business ecosystem in the UK, it cannot cherry pick. Better banking and better relationships between workers and business are vital to forging a solid base of productive SMEs, but equally important are the harsher reforms to welfare and working conditions. Instead of powerful unions, German companies contain disputes within the company; workers have a seat at the table during any major business transitions, instead of simply reacting to contracts into which they’ve had no input.
Of course, Miliband will also note that these reforms ultimately resulted in Schroeder’s political downfall, being replaced by Angela Merkel in 2005 just two years after the Bundestag endorsed the plan. But so far, Miliband has yet to prove himself as a leader that will make tough calls and that is becoming equally damaging to his prospects too.