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German Cycles give a better Ride

The article was written for OMFIF and is published here with the permission of the author.

By Bob Bischof

Was the headline of an article I wrote for the Guardian in 1994 trying to explain why the post-war business cycles in the two countries were so markedly different, and what mechanisms Germany used to flatten the cycles by anticyclical fiscal and monetary means.

The main one being of course the so-called Kurzarbeit – a kind of furlough system – helping companies in cyclical downturns to keep their staff and to prevent a vicious downward spiral of job losses, falling demand, more job losses etc etc. This system is particularly effective as it is insurance based. During the upswings in the cycle this hypothecated pot swells up and can be released during the downward leg without the cost falling immediately on the public purse.

Both employers and employees are sharing the cost of the unemployment insurance and both benefit – employees in case they are actually made redundant and employers can apply for help with their wage bill and don’t have to go through the expenses of paying for redundancy, when the order book drops and in the next upswing for the re-hiring and re-training cost.

When Peter Mandelson, now Lord Mandelson, was evaluating this during his tenure as President of the Department of Trade and Industry (now BEIS), he dismissed it as unsuitable for the UK, as it would be misused (noting some of the stories about the present furlough system, maybe, he wasn’t too wrong.)

Later Gordon Brown boasted with his famous phrase “no more booms and busts” only to be hit shortly after by the worst kind of recession since the Wall Street crash of 1929/30. In Germany for example unemployment rose by around 200.000 with employees in Kurzarbeit at 1.8 million; in the UK unemployment peaked at over 2 million or 8% of the workforce in 2010/12.

Cyclical ups and downs are as old as described in the bible as the seven fat years and the seven lean years. Business cycles vary in length and can be extended by massive fiscal and/or monetary intervention as we have seen since the 2008/9 banking crises. This time the recovery lasted nearly ten years, but was finally crashed by an unforeseen event, the COVID-19 pandemic.

The policies to get over the economic impact will be the same as in previous recessions. Countries with prudent fiscal policies will fare better than those with lose ones. The same goes of course for private households. In countries with low saving rates and high debt levels, the impact will be more severe and the state has to bail more people out with taxpayers’ money. Once more the Northern European states once again will be first out of the traps with the UK and the South suffering most hardship.

Is it possible to learn the lessons from these re-occurring events? The Chancellor of the Exchequer Rishi Sunak seems to think so, when he changed the current furlough system to the more German type of Kurzarbeit. Changing, however the benefit side of the scheme is one thing, the funding and supervisory side is a lot more difficult.

Firstly, the funding needs to be in place and the idea of anything hypothecated and anti-cyclical is hard to imagine being introduced in the UK let alone the necessary additional tax for employees and employers. Secondly, the question of supervising such a scheme to prevent fraud and supporting lame ducks needs regional input from banks, local communities, job centres and HMRC.

The institute that deals with this in Germany and that reports to the Ministry for Labour is the Bundesagentur fuer Arbeit or short Arbeitsamt, which sports 96,000 full time employees in 156 regional “Arbeitsamters “and 900 local jobcentres.  Interestingly the “Arbeitsamt” has a budget of around Euro 40 billion and is “self-administered” and has a supervisory board with employer and employee representation.

The combination of the latter also plays an important role in the acceptance or not of employer requests for Kurzarbeit support, thus to helping ensure the proper allocation of funding. This infrastructure came in handy when in April this year 155,000 firms received Kurzarbeit support (highest year before was 2008 with 55.000 firms receiving it).

The furlough system had to be created quickly and deficiencies were to be accepted. Let us hope Mr Sunak gets the new scheme right for the long term and can proof Lord Mandelson wrong. It won’t be easy.

Bob Bischof

3.10.20