Internal Adjustment in Germany: Institutional Complementarities Between Growth Strategies and Welfare Reforms

Over the last two decades, the German political economy has increasingly relied on export specialization as a strategy for economic recovery. This export-led development strategy turned out to be a mixed blessing. While on the one hand, specialization in high-quality manufactured goods has preserved Germany’s competitive edge, vis-à-vis many other industrialized countries, it has, on the other hand, led to an increasing dependency on exports as the engine for growth. There has been no equally strong evolution of a domestic service economy beyond manufacturing-related services. The issue of export dependency becomes increasingly important in light of the financial crisis and global imbalances, vis-à-vis Greece and the Eurozone but also globally. Weak aggregate demand depresses both domestic employment and endangers the still fragile construction of the Eurozone. The paper analyses the complementarities between the growth strategy of the German government and the adjustments of the welfare state.