The Comeback of Modell Deutschland? The New German Political Economy in the EU

Abstract

For several years the German economy has been lambasted within and without for its economic "rigidities" and lack of dynamism. Accordingly, there has been no let-up in the proposals to get the German economy "on track". Since the early 1990s four institutional weaknesses have taken their turn (or in combination) as the popular 'whipping boy' for German's ills: a backward-oriented bank dominated financial system unable to finance modern risk-oriented investment; an insider-dominated corporate governance system resistant to restructuring; rigid labor markets and inflexible unions; and an overly expensive welfare system. Without denying that there are (or have been) real inefficiencies in these institutional domains, this paper takes a more sanguine view of the flexibility and institutional dynamism exhibited by the Germany political economy during this period. It argues broadly that the German economy has undergone quite dramatic change and in many respects is leading the broader European economy toward new institutions and a new accommodation between labor and capital. The paper specifically examines changes in the German corporate governance system and their implications for corporate restructuring, innovation, and investment, as well as the changing role of labor in corporate governance. Substantial research has already demonstrated that the institutions of co-determination in Germany are facilitating corporate restructuring and economic dynamism. Thus Germany's labor institutions are not necessarily a barrier to a more dynamic European economy and may, indeed, be a model for others to emulate. The resolution of Germany's core problems of low growth and high unemployment lay elsewhere.

Keywords: Germany, corporate governance, industrial relations

JEL Classification: G30, G38, L50, L58, P52