German labor market and fiscal reforms 1999–2008: Can they be blamed for intra-euro area imbalances?

Abstract

In this paper, we assess the impact of major German structural reforms from 1999 to 2008 on key macroeconomic variables. These reforms, especially the Hartz labor market reforms, are considered by many to be the root of observed imbalances in the Euro Area. Our simulations within a two-country monetary union DSGE model show that, in terms of German GDP, consumption, investment and (un)employment, the reforms had clearly favorable effects, though the impact on the German current account was only minor. Also, the rest of the Euro Area benefited from positive spillover effects. Hence, our analysis suggests that the reforms cannot be held responsible for the macroeconomic imbalances currently visible in the Euro Area.