Reported figures show that in Germany there are now some 1,3 million people who have to be paid allowances (‘Hartz IV’) to lift their income just a bit above the subsistence level.

This trend which started in the early 2000s with the social and economic reform program (‘Agenda 2010’) is mostly described in perspective of the (involuntary and voluntary) unemployed. It is said that a ‘social market economy’ (‘soziale Marktwirtschaft’) can only survive in the 21st century when every able-bodied is made to work even if his/her work is not productive enough to pay sufficient remuneration. If that should be the case the state is going to step in with extra payments (‘Aufstockung’) for relief. All in all it will be better for the employed, the claim goes, because lower unemployment means a better position for the individual worker to bargain for a higher wage. This was part and parcel of the then hyped new social democratic ideology, the ‘Third Way’ (in Germany the slogan was ‘Neue Mitte’) 1 of course conservatives and liberals liked the concept and carried it on when they got elected.

Moreover, it was kind of easy to enforce this policy because it did not meet criticism by strong trade unions. On the one hand working conditions (i.e. the contractual relationship between employer and employed) were already fragmented in a way that ever more working people were not associated in anymore in any form. On the other hand in nationalist-corporatist fashion the existing trade unions even joined forces with the government and the private business sector to keep wage increases low (official speech: ‘moderate Lohnsteigerungen’, in fact it amounted to stagnation of real wages) because their’s was not progressive politics anymore but only cared about the protection of the already employed and feared competition of the growing ‘reserve army’ of unemployed or new forms of ‘precarious’ employment contracts (‘atypische Beschäftigung’).

But hardly anybody ever observes this from the angle of the employers or the national economy as a whole. In fact, the systematic aid-in-wages can be understood as indirect subsidies for companies whose business-model is simply not working. This amounts to an perverted incentive structure that produces wide-spread wage depression. According to statistics ca. 20% of the employed now work in the low-wage-sector (‘Niedriglohnsektor’); The former chancellor Schröder (SPD, social democrats) once proudly exclaimed at the World Economic Forum in Davos in 2005:

We have built up one of the best low wage sectors in Europe.

The ongoing Euro Crisis in part is a direct consequence of this system of this systematic distortion of the price for labor. The current account surplus of Germany that climbs to ever new historic highs wouldn’t have been possible without the deep cuts in the German labor-market (‘internal depreciation’; plus the favorably monetary policy of the ECB back then to safe Germany from deflation. 2 Germany became ever more dependent on this export-led growth model as the sector now accounts for about 50% of GDP. There have been numerous attempts to push Germany to do more to start-up domestic demand. For example European Commissioner for monetary affairs Olli Rehn said in April:

We recommended that Germany take steps to boost domestic demand through structural reform, which we find more important.

Recently, European Commissioner for social affairs Laszlo Andor asserted that Belgium and France openly complained about Germany and accused the country of ‘social dumping’. Unfortunately I’m lacking the imaginative capacity to see signs of a change of course in the light of current sentiment in Germany (pride about being ‘world champion’ of export, unwillingness recognize need for an improvement of domestic demand, belief that Germany ‘is paying’ for all other countries’ ‘faults’) especially given the emotional simplifications to be heard during the upcoming election campaign.

There’s even a historic precedent for all this. The infamous pseudo-humanitarian Speenhamland Act of 1795 prominently analysed in Karl Polanyi (1944): The Great Transformation. Put simply, it was a ‘poor relief’ system irrespective of the individuals’ earnings. It’s political aim was not so much to alleviate poverty alone as to protect the traditional paternalist system on which the landed class (squirearchy) rested. The consequence (assisted by anti-trade-union law) was a depression of wages and the impoverishment of the nascent working class during the Industrial Revolution in late 18th to mid 19th century England.

As a matter of fact the discussion about Poor Law Reform back then was the starting point of the political economists’ naturalistic fantasy of self-regulating markets that automatically lead (only in the long run of course 3) to a balanced economy and the best possible welfare-gain for society. More akin to a religious belief system than sound scientific opinion it saw its revival in the 1970s as Thatcherism/Reaganism and its many metastases that we now call Neoliberalism.

The devastating economic crisis – especially in Europe – we’re now facing these days is not only a consequence of this world view turned policies but also gets prolonged by it. It seems the hegemonic way to think about resolving the crisis is depressing wages (officially: ‘internal devaluation’) and ending the role of the state as an investor of last resort (officially: ‘fiscal austerity’). Let alone the economic (in the strict sense) implications it is striking how unaware today’s politicians are of the devastating impact of their decisions on the social fabric that will haunt us long after the economic figures will show ‘improvement’. On a rhetorical level the austerity front is crumbling but what does this mean policy-wise? For the time being everything done has been too little, too late.