Are Labour Market Reforms the Answer to Post-Euro-Crisis Management? Reflections on Germany’s Hartz Reforms

Abstract

This article is an attempt to clarify the effects of the German labour market reforms, commonly known as the Hartz reforms. Competing arguments were used to identify the welfare implications for German society and the German economy in order to explore whether or not such labour market reforms might provide another German answer, following fiscal discipline, to the EU’s post-euro-crisis management. This paper confirms that the Hartz reforms effectively reduced German unemployment, but they did not fundamentally solve the problem. Moreover, such effects appeared to propagate an increase in size of the low-paid sector, declining wages and increasing income inequality. The reforms were not welfare-enhancing for individuals because of increased poverty levels in employment and unemployment, which further implied a counter-productive risk for the German economy because of the contraction of domestic consumption, and potential social instability for German society because of rising inequality and deteriorating living standards. Therefore, Hartz-style reforms are neither a desirable model for other EU countries, nor the answer to Europe’s post-euro-crisis management in a time of fiscal austerity and negative interest rates. The real danger to European integration, as argued in this article, is not the challenge from high unemployment, but from Germany’s complacency of a one-size-fits-all thinking and, being the EU’s leading country, its double standards towards and ignorance of the differential nature and contexts of the European unemployment issue compared with the German one. This article warns that the mishandling of labour market reforms could result in the collapse of the already fragile public confidence in European integration.