Challenges for the German welfare state before and after the global financial crisis.

• Author: Hallerberg, Mark
• Position: Essay

Germany has a northern European welfare state. This means that social benefits are extensive compared not only to the American standards but compared to other European countries, such as Italy or Spain. In the early 2000s, both foreign observers and Germans themselves considered the country the "sick man of Europe." Its firms seemed increasingly uncompetitive, due especially to its costly labor. Economic growth in this period was stagnant. This "exporting giant" even had a slight current account deficit.

A decade later, perceptions of the country changed; it is now perceived as the only economy that can keep Europe afloat during the storm of the euro crisis. Some in southern Europe complain that the Germans were the main beneficiaries of the euro, and they should therefore pay more to ensure the common currency's survival. The main argument behind tiffs assertion is that the German mark entered the euro at an undervalued rate. This argument ignores, however, the reforms that a center-left coalition in particular put in place that made the German economy more competitive. A telling statistic is unit labor costs while they remained roughly the same from 2001 to 2011 in Germany, average unit labor costs in the eurozone increased 20 percent. Rather than current account deficits, the country runs large current account surpluses. The unemployment rate, which approached 10 percent in 2005, now approaches 5 percent, well below even the United States. What changed during the 2000s set up the country to do well in the period after the global financial crisis? This article reviews Germany's major welfare reforms as well as some reasons why they were put in place. It also covers the period both before and after the global financial crisis, and it concludes with a few thoughts about the challenge of demographic change to the viability of the German welfare state.

Reforming the Welfare State

As Mike Hassel (2010) argues, the transformation of the German welfare state began after reunification in 1990, but it reached its peak with the Hartz IV reforms, which were named after Peter Hartz, the chairman of the commission that considered reform options. Those reforms, in turn, were embedded in Chancellor Gerhard Schroder's Agenda 2010 program. The chancellor had formed a Red-Green alliance composed of the Social Democrats and the Green party after his electoral victory in 1998. The state of the economy was an electoral issue in 2002. His perceived strong, and...