German revival exposes deep fissure within Europe’s economies

In the 1990s and early 2000s, Germany was seen by many as the new ‘Sick Man of Europe’. Between 1991 and 2005, GDP growth averaged only 1.2 per cent a year, compared to 3.3 per cent in the UK. Since then, the German economy has revived dramatically. The recovery in the German cluster of economies from the financial crisis has been as strong as in the United States, with the previous peak level of output being regained in 2011. Germany itself experienced virtually no increase in unemployment in 2008 and 2009, its exports are at record levels, and even the crisis in the Euro area has not prevented expansion in both output and employment.

There are two reasons which are frequently given for this. The first relates to the favourable exchange rate at which the German mark entered the Euro, giving an initial competitive edge to the economy. The second is the so-called ‘Hartz reforms’, a series of legislative labour market reforms which began in the mid-2000s. Both have validity.

There is a deeper reason for the recent turn-round in the performance of the German economy, which is rooted in institutional structures. In an article in the most recent Journal of Economic Perspectives – one of the world’s top academic journals – Christian Dustmann and colleagues agree with the general view that the evolution of unit labour costs has played a key role in the favourable performance of German tradable goods. But the main reason for this is in fact ‘the specific governance structure of German labor market institutions which allowed them to react flexibly in a time of extraordinary economic circumstances’.

German labour market flexibility is not based on legislation, but is laid out in contracts and mutual agreements between the three main actors in Germany: employer associations, trade unions, works councils. The formal institutional structure has remained unchanged, but there have been major changes in recent years in the way in which it works in practice. In particular, there has been a massive decentralisation of the wage-setting process from the industry level to the firm level, with a sharp fall in the proportion of workers covered by union agreements.

The fall of the Berlin Wall created opportunities for German industry to both source from, and relocate to, countries such as Poland and the Czech Republic which had stable political structures and skilled labour forces. Gradually, the German labour force appreciated that these developments required it to operate in a considerably more flexible way than it had previously. This has led to a rise in wage inequality within Germany, but the benefits have been a strong employment and output performance.

This decentralisation is in sharp contrast to economies such as Italy and France, where union wages and work hour agreements apply to all firms within an industry, or are subject to legal limits. These countries lack the flexibility and resilience which are required in a globalised economy. The structural problems of the EU run much deeper than the public debt issues revealed by the financial crisis.

Paul Ormerod

As published in City AM on Wednesday 19th February 2013

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Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

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Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.