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Germany’s Lessons for a Strong Economy

One Key Ingredient Is Cooperation Between Businesses and Unions

http://cdn.americanprogress.org/wp-content/uploads/issues/2012/06/img/german_economy_onpage.jpg

SOURCE: AP/ Axel Heimken

Michael Vassiliadis, president of Germany’s industrial union for Mine, Chemical and Energy Workers, or IG BCE, and the newly created European trade union federation IndustriAll, credits strong unions and culture of dialogue with business as the keys to Germany's relative weathering of the global financial crisis.

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From the point of view of many in the United States, the current success of Germany’s economy is not far from a miracle. The export industry is strong and the International Monetary Fund forecasts a German unemployment rate of 5.6 percent for 2012. But how was the country and its manufacturing sector able to weather the economic and financial crises that hit U.S. companies and the labor market so hard?

For Michael Vassiliadis, president of Germany’s industrial union for Mine, Chemical and Energy Workers, or IG BCE, and the newly created European trade union federation IndustriAll, the answer is surprisingly simple: thanks to German unions and a culture of dialogue with business. Seifi Ghasemi, chairman and CEO of the specialty chemicals and advanced materials company Rockwood Holdings, Inc., agrees. Their statements reflected in this article are based on a panel discussion organized by the Just Jobs Network in May 2012.

Let’s start with Vassiliadis. He represents 8 million European industry and manufacturing workers. By focusing on high-value and specialized consumer products and by developing an industrial innovation network, as Vassiliadis calls it, the German export industry became highly competitive. Today the manufacturing sector adds 30 percent of value to the products it creates and the industry employs 30 percent of Germany’s workforce.

These developments did not happen overnight. German companies have been investing in research and development for decades. They also profited from the political and economic developments after the fall of the Iron Curtain. Growing demand from central and eastern European countries as well as China helped spur the economic engine. Additionally, the introduction of the euro helped lower the real exchange rate and made the German economy more competitive. In 2011 exports to the eurozone countries made up about 40 percent of Germany’s exports.

But what role did trade unions play in all of this? Some in the United States subscribe to the belief that unions are simply a cost factor, driving up unit labor costs and diminishing competitiveness. Additionally, they are often seen as inefficient organizations that stifle innovation and growth. For Vassiliadis this view of industrial relations is more a caricature than an image of reality for Germany. German unions are partners for businesses and through effective co-management in the form of legally secured co-determination, they have a say in developing long-term strategies for economic success for both businesses and workers. That leads to a sense of shared responsibility.

That does not mean that German unions do not represent the interests of their workers.  They do, but they do more than that: Unions also look at the economic needs of the company understanding that a healthy private sector is also good for workers, and when workers and businesses work together, it fuels a healthy economy and society.

This cooperative approach paid off in the recent economic and financial crises, too. Thanks to close consultation between employers, employees, and political actors, German companies were able to keep their workforce. Workers accepted pay cuts and shortened working-time arrangements, but due to flexible work accounts and government co-funding, the negative effects were absorbed to a large degree. Safeguarding jobs also helped businesses save costs on rehiring and retraining. When the economy picked up again, German companies had a skilled and motivated workforce in place to take advantage of rising demand.

The conclusion that Vassiliadis draws from this might sound like a paradox to American ears: The stronger the unions, the better off the economy will be. But his argument is compelling. If you have weak organizations, they will do everything to fight for their survival. That leads to constant campaigns and conflicts. Both are costly and counterproductive. The German model of co-determination offers an alternative. Established channels of communication and trust create a win-win situation for businesses and employees.

So what are the lessons for the United States? Building up a framework of co-determination would likely be impossible in the United States because of cultural and legal differences, but Vassiliadis recommends a form of dialogue between employers and employees, such as works councils, and new tools in the form of labor rights. Changing the existing labor law will not be easy but new structures need to be built over time. There is no quick solution to strengthening U.S. unions.

But what do U.S. businesses think about the strength of German unions and their economic role? Ghasemi took a big risk when he first started investing in Germany in 2003. According to fellow American business representatives, the strong position of German unions in the chemical sector was a recipe for failure.

Ghasemi’s success proved them wrong. His company’s sales doubled to $2.7 billion over the past eight years, and the profit increased from $300 million to $700 million over the same period. Today Rockwood employs 7,700 workers and the company invested $1 billion in Germany’s economy during the past seven years. The secret of his success: Ghasemi was able to develop a dialogue with the unions.

The economic crisis did not spare Rockwood, but the company’s resilience was based on established communication structures between management and workers. German workers had to take pay cuts, but the decisions were discussed, made, and sold with the help of unions, who were trusted partners for both sides.

Ghasemi knows that collective bargaining and the role of unions are different in Germany. And the company’s relationship with unions in the United States is less cooperative. In his view this has to do with differences in the U.S. labor law and different experiences. The extreme elements become strong in disputes and he identifies “war” between management and unions as the fundamental problem.

In Ghasemi’s view the weak role of trade unions in the United States also has to do with the eroding middle class. The basis for the “old,” strong middle class were manufacturing jobs that allowed workers to build a career over several decades. What was important was not only the income and the sharing of productivity gains but also job security and economic mobility—the notion that if you work hard, you will be able to create a better life for yourself and your family.

People built their lives on secure income and jobs, something that has been lost in the past two decades. The composition of the U.S. economy and the large size of the service sector that accounts for many insecure and lower-wage jobs is part of the problem. To rebuild a strong middle class, the United States needs an advanced manufacturing sector and that sector requires strong unions. It is not employers or companies that create jobs, Ghasemi emphasized, but the consumers that ultimately drive economies. If workers don’t have jobs, they won’t consume, and if they don’t consume, this will hurt the private sector and the economy.

Another important element for building a middle class is a skilled workforce. The German apprentice system could be a model for the United States. In the absence of good vocational and skills-training opportunities, many up-and-coming workers in the United States tend to pursue an academic track, fueling a shortfall in workers that have the skills demanded by the manufacturing sector.

The stakes for the United States are high. Ghasemi worries that insecure jobs and a shrinking middle class will eventually destabilize the social order. If people have nothing to lose, they will act accordingly. Strong unions, one could argue, are beneficial not only for the economy but are also building blocks for stable democratic societies.

Knut Panknin is is a program officer in Washington for the Friedrich Ebert Foundation, a nonprofit German political foundation committed to the advancement of public policy issues in the spirit of the basic values of social democracy through education, research, and international cooperation. The foundation’s Washington office is a member of the “Just Jobs” network organized by the Center for American Progress in its Just Jobs program.

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