No Way to Escape Imbalances in the Eurozone? Three Sources for Germany’s Export Dependency: Industrial Relations, Social Insurance and Fiscal Federalism

Abstract

Over the last two decades, the German political economy has increasingly relied on export specialisation as a strategy for economic recovery. This export-led development strategy turned out to be a mixed blessing. While, on the one hand, specialisation in high-quality manufactured goods has preserved Germany’s competitive edge vis-à-vis many other industrialised countries, it has, on the other hand, led to an increasing dependency on exports as the engine for growth. There has been no equally strong evolution of a domestic service economy beyond manufacturing-related services. The issue of export dependency becomes increasingly important in light of the financial crisis and global imbalances, vis-à-vis Greece and the Eurozone but also globally. Weak aggregate demand depresses both domestic employment and endangers the still fragile construction of the Eurozone. The paper argues that Germany finds itself in an export-dependency trap due to imbalances between domestic services and export-driven manufacturing. It analyses three sources for the over-reliance on export-oriented manufacturing and weak employment in domestic services: firstly, the industrial relations system, secondly, the social insurance financing of the welfare state and thirdly, fiscal federalism. All three are fundamental pillars of the German political economy and locked into political coalitions that are not easily changed.