Agenda 2010 – The Key to Germany’s Economic Success

The crisis in Europe has demonstrated that there is going to have to be a change of direction, not only in Germany, but throughout the European Union, if we want our continent to be in a position to meet the challenges of the future. For this reason we need a programme for the reform of Europe’s national economies. And on the European level we need a programme of reform that will change the way it is organized in political, social, economic and fiscal terms.

The European crisis provides us with an opportunity. We often talk about whether it is actually possible to reform developed industrial societies. However, it seems true to say that reforms can certainly be introduced in times of crisis. On the one hand the crisis provides the political justification for what is a necessary and occasionally harsh policy of reform. And on the other hand in such times in particular there tends to be social acceptance of reform. And that is of some importance for democratic policymaking.

In other words, what this means is that reforms are now absolutely essential, but also that they are a distinct possibility. The problems are all too familiar:

  • As a result of the global financial crisis there is a pressing need to consolidate public budgets.
  • It is important to reinforce the competitiveness of EU states because emerging economies such as the BRIC states are rapidly catching up, and because there are great disparities within the European Union.
  • And the demographic pressure on the social security systems has not abated. For this reason there is an ongoing need for fine tuning in order to ensure the effectiveness and financeability of the welfare state.

To all intents and purposes these are the sort of arguments we were grappling with in 2003 as we worked on the Agenda 2010. When I unveiled the programme of reform in the German Parliament in March 2003 I said:

Either we modernize ourselves, and by that I mean as a social market economy, or others will modernize us, and by that I mean unchecked market forces which will simply brush aside the social element.

This is just as true now as it was almost ten years ago, if, that is, one looks at the turmoil on the financial markets and at the consequences.

You have asked me to make a few remarks about the Agenda 2010 reforms and what we have learnt from them. I am perfectly happy to do that. However, I am not going to give you any advice about what is happening in Belgium. It is not up to me to say whether certain measures, in particular our labour market reforms, can be transferred to Belgium. These are things that you will have to decide for yourselves.

Ten years ago many international commentators considered Germany to be “the sick man of Europe.” Today Europe thinks that Germany is a model worth emulating. There are reasons for this economic strength, and the political strength that goes with it. The years between 2000 and 2005 were the years in which Germany modernized itself, and in which it laid the foundations for the economic boom after 2006 and the swift recovery from the recession in 2009.

This is partly due to the fact that Germany possesses a unique economic structure that is characterized by a strong industrial base and a strong SME sector. This is in stark contrast to Britain, which bet heavily on financial services and is now practically de-industrialized. Germany, on the other hand, has in the recent past pursued a policy of supporting the industrial base and the SMEs. Moreover, in Germany the social partnership proved its worth during the crisis. The wage bargaining partners acted in a very responsible manner, and over the past few years reached agreement on flexible and moderate wage settlements.

An ancillary measure was the practice of paying short-time working benefits. Such government assistance compensates workers for lost wages when employers reduce their working time as a result of an economic crisis, During the 2009 recession this not only prevented a great deal of social hardship and unemployment; it also helped employers to retain highly qualified skilled workers. And these skilled workers enabled companies to ramp up production rather quickly after the crisis was over. But the high competitiveness of German industry is also due to the policy of reform.

In Germany we pushed through a reform of the welfare systems much earlier than in other European states. Other countries are now starting to copy the Agenda 2010. On an international level it is considered to be a model worth imitating. The reason for this is that all the developed industrial societies in Europe are confronted with similar challenges, and these are globalization and the demographic developments. With the help of the Agenda 2010 we adjusted the welfare systems in order to make it possible to pay for the welfare state and to enable it deal with the challenges of the future. We reformed the labour market, pushed through longer working lives, and initiated pension reform by creating a second pillar in the shape of investment-based retirement provision. And at the same time we invested more in research and education, in facilities for looking after children in day care centres, and in schools.

The Agenda 2010 was the most comprehensive reform of the German welfare systems since they were first introduced. For this reason it provoked a lot of opposition. And even today, ten years after we decided to go ahead with it, it is still controversial. But what in fact was it really all about? First and foremost we wanted to and we had to deal with the backlog of reforms which had accumulated in the previous two decades on a societal level and in the welfare system. There can be no doubt about the fact that the welfare systems were not transparent and, more to the point, they were inefficient. And they were one-sidedly designed to give support to those in need.

As far as I am concerned there is a central and basic principle at the heart of the various reforms in the Agenda 2010, and that is the principle of “require and support.” It is all about achieving a balance between the solidarity of society on the one hand and an individual’s responsibility for himself on the other. The welfare state guarantees – and must guarantee – that people have a right to protection in situations that pose a threat to their existence. But it should not absolve people of their duty to do all that they can to obviate the need for help.

So first of all one has to ask people to be responsible for themselves. And this includes encouraging them and enabling them to go back to work. That at least is how I understand solidarity. That is what is meant when one says “require and support.”

The results of the Agenda 2010 are something we can be proud of. In Germany we have reached a new low in the unemployment statistics. They have gone down in structural terms by 2 million. Compare this with the eurozone, where more people are now out of work than at any time since the introduction of the common currency. 17 million people. In the case of people under 25 the unemployment rate in Spain has reached 50 percent. In Italy it has reached 31 percent, and in France it has reached 23 percent. In contrast to this, in Germany the figure is about 8 percent.

The current OECD country report on Germany shows that this positive state of affairs can primarily be ascribed to the labour market reforms introduced by the Agenda 2010. With the Agenda 2010 we were able to demonstrate that Germany, which ten years ago was thought to be incapable of coming up with reform, is capable of making changes after all. So this was not only a structural reform; it was also a cultural reform. The policy of reform has enabled me to gain certain insights. The most important of these as far as I am concerned are as follows:

First, in abstract terms people are always very willing to embrace reform. In opinion polls the vast majority of the electorate would always say that the country and society at large need to change. However, if people are personally affected by all this, then the willingness to embrace reforms quickly turns into rejection. We saw this kind of thing in Germany, where there were large demonstrations against the Agenda 2010. We are now witnessing similar protests in other European countries, and some of them unfortunately have been rather violent. However, this should not deter us from doing what needs to be done. Policy-making must have enough energy to want to and to be able to implement those things which are necessary. Even if it means being voted out of office.

Second, there is a time gap between the sometimes painful decisions to implement reforms and the benefits that first begin to accrue at a later stage. Since in democratic systems policymakers are continually required to demonstrate their legitimacy – at regular intervals in local, regional and national elections – there is always a danger that the voters will mete out punishment without further ado. However, a longer period of time is needed until the reforms begin to have a positive effect. In the case of the Agenda 2010 it took about five years. Democratically elected policymakers can come to grief by falling into the time gap between a decision and what it manages to achieve. This danger now exists in Europe for courageous governments such as the one led by my friend Mario Monti. But here again it is important to remember that the well-being of one’s country is more important than the well-being of political parties.

Third, the welfare systems in all developed industrial societies are very complicated. The consequences of a particular measure are not entirely predictable. For this reason reforms cannot be infallible. It is important that policymakers are in a position to make amendments at a later stage. To my mind the notion of “making amendments at a later stage” has been criticized unjustly. We should not be afraid of politicians who correct mistakes they have made; we should be afraid of politicians who are unwilling to admit that they have erred, and as a result do nothing at all.

There are two places in the Agenda 2010 which, with the benefit of hindsight, I would now amend if I had the opportunity to do so.

From the middle of the 1990s onwards the low-wage sector in Germany continued to grow. Whilst the labour market reforms did not create this sector, they certainly strengthened the trend, and did so quite deliberately. The idea was to use the low-wage sector to enable people who were not particularly well qualified to gain access to the primary labour market. To a certain extent this was a success, but – and one must be quite open about this – it is being abused by employers who are trying to reduce their labour costs. I think a meaningful way of redressing this fault would be to introduce minimum wages. However, I can understand the position adopted by many trade unionists who are of the opinion that a law which stipulates a basic minimum wage constitutes a threat to the German system of autonomous wage bargaining. That is why I believe that precedence should be given to sector-based minimum wages.

Or let us take another example, temporary work. With this part of the reform agenda we wanted to make it easier for companies to cope with peak workloads. But if companies are going to use the law in order to replace parts of the core workforce, then that is an abuse which must be stopped. A temporary worker at a workbench who is doing the same work as a fellow worker from the core workforce must get the same wages. And by the way, this demand must apply to both men and women. There is still a 20% difference in wage levels between men and women, and that really should be a thing of the past.

Fourth, the fate of all reforms, and even of the most sensible ones, is that people try to turn the clock back. That is something that history teaches us. Reforms are followed by restoration periods. That has also happened in the case of the Agenda 2010. Although it has led to positive results, it is often called into question, and important points are being rescinded. We saw it happen with regard to the length of time people were paid unemployment benefit, and again in the debate about the retirement entry age. As a reformer that is something I would criticize, for I am not so much concerned with individual measures that have been rescinded. What perturbs me is the fact the policy of reform as such is being called into question. But if society is no longer willing to change, then the whole system is going to become ossified.

The current positive economic situation in Germany may lead some people to believe that further reforms are unnecessary. However, that is rather short-sighted, because there is still a pressing need for reform. On the one hand this is because other European states are now adopting painful reforms and thus improving their competitiveness to the detriment of Germany. And on the other hand it is because our ageing society makes change an inescapable necessity. With a declining population we need to increase the labour force participation rate in order to maintain our economic strength and employment.

A new agenda must face up to this challenge:

  • More women must be encouraged to enter the workforce by devising better ways of combining family and work.
  • The educational system must be organized in such a way that no one is left behind. That is the real purpose of integration. Children of immigrant families must be trained in the best possible way in order to become the skilled workers of tomorrow.
  • And finally we must introduce a modern kind of immigration policy which makes our country more attractive for highly qualified skilled workers.

I have described that as “Agenda 2030,” though I was not primarily concerned with the term “agenda”. What I was really trying to say is that reforms are necessary if we want our society to have a future and if we want to live in peace and prosperity in the year 2030. We also need a reform agenda on the European level in order to rectify the central design fault of the monetary union.

The basic mistake was made when the monetary union came into being, because it failed to stipulate the need for the coordination of economic and financial policy in the eurozone. However, the current crisis demonstrates that one cannot have a common monetary zone without common finance, economic and social policies. We must now strive for more and not for less Europe. And it is up to the political leaders in the nation-states to champion the European idea more openly and in a more vigorous manner.

This, for example, applies to growth initiatives, structural reforms, and proposals to strengthen the European institutions at the expense of the nation-states. And it is above all of paramount importance to impart greater democratic legitimacy to European decision-making, for people quite rightly object to the fact that far-reaching European decisions are currently being made with the help of impenetrable procedures.

It is time to change the whole nature of European economic and finance policy. In fact, it must stop being a policy of making cuts, and must be turned into a policy of promoting growth.

The measures that have been adopted are certainly the right ones:

  • The creation of safety nets with resources of €800 billion – even though all this should have been done more quickly, and though they should have been much larger from the start.
  • The liquidity provided by the ECB for the financial markets and ECB purchases of government bonds are necessary in order to stabilize the eurozone.
  • The fiscal compact is an important additional measure which in the long term will create greater stability in the national budgets.

But the fiscal compact has a weakness that needs to be rectified. Greece, Ireland, Portugal, Italy and Spain have made considerable progress with regard to sorting out their shaky finances. But the economic and political situation in these countries shows that making cuts is not the only way in which the crisis can be overcome. In fact the opposite is the case. There is a danger that the national economies will, as it were, be strangled by a strict policy of austerity. In Greece this has already happened.

This policy is fraught with danger. It de-legitimizes democratic policymaking in the nation-states, which see themselves confronted with violent protests and the growth of populist and extremist parties. But in economic terms this policy is also out of place as far as the European Union as a whole is concerned, since what is happening in these countries affects the other export-driven economies. More than 60 percent of German exports are absorbed by the European Union. For this reason we would be well advised to cushion the impact of harsh austerity measures with programmes designed to promote growth. So we need to add a growth component to the thoroughly sensible fiscal compact. And for this purpose we could, for example, use the revenues from a financial transaction tax, which is something that I am in favour of.

When all is said and done we are now recapitulating a debate which we conducted about the stability and growth pact between 2003 and 2004. In trying to reform the pact, Germany and France were not attempting to emasculate its criteria. What they wanted to do was to emphasize the growth element, since Germany was not in a position to cut spending to the tune of billions of euros in addition to pursuing the policy of reform. The lesson learnt back then was that structural reforms can only make an impact if at the same time one stimulates growth. We must now give this opportunity to our European partners.

Only a united Europe can survive in the midst of global political and economic competition, since on its own a nation-state is simply too weak. That is why the nation-states and the European Union as a whole need to go ahead with a reform process. Germany has found an answer in the Agenda 2010. I am confident that Belgian policymakers will also meet the challenges with which the country is confronted – with their own concepts and ideas. As we all know, these days I am merely responsible for the analytical side. Other people must do what needs to be done. But one thing continues to be rather important, and it is something that I would like to emphasize at this point. We can create a bright future only if we combine economic strength and social justice. And so with this in mind I hope that the conference will be a resounding success.

This column is the transcript of a speech delivered at the Belgian/German conference jointly organised by the Bertelsmann Foundation and the Egmont Institute.

  • http://www.facebook.com/kurterichmest Curt Erich Mest via Facebook

    Aha, “use the crisis as a pretext for more of the policies that brought about the crisis.” And: “Reforms are by definition neoliberal, everything else is called ‘backlog of reforms'”. He’ll never learn.