Introduction

Since the turn of the millennium, the German model has been characterised by a period of major reforms, followed by a period of remarkable stability and growth in times of global economic crisis. In Germany, austerity-related reforms occurred between 2003 and 2005, when a fundamental restructuring of the welfare system was perceived as necessary to ensure international competitiveness and fiscal sustainability in a situation of high unemployment and repeated failure to stabilise and ensure economic growth. After the first change of government since reunification in 1998, the new centre-left government was criticised for failing to cope with the economic effects of reunification, globalisation and demographic change. Germany repeatedly failed to adhere to the fiscal discipline of the European Stability and Growth Pact, which was central to the workings of Economic and Monetary Union (EMU). Both internal and external pressure led to policy reforms and fundamental changes in the pension and unemployment insurance systems, as well as social assistance schemes. In addition, the German model experienced a relaxation of capital market regulation, accompanied by a reduction of corporate taxes. After these reforms concluded in the mid-2000s, Germany has not continued with any austerity strategy in economic or social policy beyond sticking to fiscal constraints and the debt brake. On the contrary, since the financial crisis hit Europe, the government has responded with policies promoting growth and expansion.

During 2008–09, most Organisation for Economic Co-operation and Development (OECD) countries were hit by the financial crash and subsequent crisis and have struggled to recover ever since. In contrast to most countries, Germany not only managed to respond quickly to the effects of the crisis with fiscal stabilisation policies, but also managed to reduce unemployment to a lower level than before the economic crisis. Germany experienced a severe drop in gross domestic product (GDP) of over 5% in 2009, but through various quick policy responses – such as short-time working and the car scrappage programme – German firms recovered quickly. Ever since, Germany experienced employment growth and the highest average economic growth rate within the Eurozone. In contrast to most neighbouring countries, neither economic institutions nor major economic reforms were seen as necessary to stabilise the national economy. The current policy orientation is rather one of moderate re-regulation of the labour market and welfare state expansion.