Germany’s response to COVID-19 has reinforced the strength of its coordinated economic policies. Europe’s strongest economy designed an economic and political response to COVID-19 building on its experiences during the Global Financial Crisis (GFC) that began in 2008. The German political model, a Coordinated Market Economy (CME) according to the Varieties of Capitalism (VoC) model, can be credited for its recurring success.[i] Hall and Soskice’s VoC model sheds light on the diverse nature of international economies and makes a clear distinction between two types of market economies, which are referred to as a Liberal Market Economy (LME) and a Coordinated Market Economy (CME).[ii] As the effects of COVID-19 continue to have detrimental economic consequences worldwide, countries with LMEs, such as the US should introduce coordinated policies in order to reduce the financial burden of the pandemic. Implementing progressive welfare policies, establishing labour protection policies, and regulating private-sector debt are all fundamental policy shifts that must also occur in the US in the process of adaptation to coordinated systems in order to effectively face the ongoing COVID-19 health and economic crisis.

Coordinated Market Economies: Germany

CMEs, such as Germany, use coordinated systems to articulate compromise between capital and labour representatives and ensure fair standards are understood and considered when banks finance economic ventures.[iii] CMEs distinguish themselves from LMEs particularly in employment systems and centralization: two important factors of market economies. In Germany, trade unions and employers’ associations collaborate to create coordinated wage-settings and vocational training programs.[iv]  The model suggests that German corporations prioritize long-term employment strategies and employment security over short-term goals and layoffs.[v]  During the recovery period following the 2008 financial crisis, Germany’s share of short-time workers nearly doubled by June 2009. This represented nearly one in every 20 employees experiencing an hourly cutback of 30 percent.[vi] Germany’s crisis response and its emphasis on labour retention can be strongly attributed to the underlying conditions of firm behaviour and the meticulous adaptation of labour market tools.[vii]

In the wake of COVID-19, Germany’s Federal Ministry of Finance targeted three spheres of the European labour market: safeguarding jobs, creating supportive tax measures, and a joint European crisis management project.[viii] Since March, the Eurogroup has fostered a coordinated response with the agreement that all national authorities will allow automatic economic stabilizers, liquidity support for firms, support for affected workers, and will complete these goals with a coordinated effort at the European level.[ix] Examples of this coordinated response are the European Commission’s proposal for a €37 billion Corona Response Investment Initiative, €28 billion in structural funds, and the European Investment Bank’s mobilization of as much as €8 billion to €15 billion toward capital lending for 100,000-150,000 European firms.[x]

Liberal Market Economies: The United States

Countries relying on a liberal system, such as the US, have a different approach to managing financial crises. The US is categorized as an LME in the VoC model, its characteristics including limited public expenditure, low levels of redistribution, and weak social support programs.[xi] While the US has passed two relief bills, totalling $5.3 trillion, in the face of the COVID-19 crisis, [xii]  policies that have been implemented do not support Americans equally. A clear example is the effort to stabilize Wall Street, which led to substantial tax benefits for wealthy business owners, while middle and low income communities await financial support.[xiii] Studies report that 82 percent of the individuals who profit from COVID-19 tax benefits in the US earn $1 million or more per year and only 5 percent earn less than $200,000 per year.[xiv] While corporations such as American Airlines and Delta, which received $5.8 billion and $5.4 billion in assistance respectively, have received government aid, many US businesses have continued to lay off thousands of workers.[xv] This approach is consistent with the case of the 2008 crisis, where American banks were bailed out shortly after the GFC, while the working class suffered long-term negative repercussions.[xvi]

It should not come as a surprise that the US unemployment rate reached 19.5 percent in April 2020.[xvii] Recent patterns suggest that the US growth model does not succeed in times of economic uncertainty. The American economy collapses when markets freeze, as experienced during the COVID-19 lockdowns, and the aftermath of such shocks is incomprehensible.[xviii] The inherent response to protect large companies while workers carry the burden is decisively what has heightened the effects of the pandemic in the US.[xix] Moreover, the burden of private-sector debt—such as credit card debt, student loans, and medical debt—has amplified the inability of the US economy to react to the pandemic.[xx] These reactions have highlighted differences between the US and more coordinated countries, and the remedies to minimize the burden of the pandemic in the US would require substantial political change.

Making the Necessary Shift  

The transition toward a coordinated market model would require labour regulation, progressive welfare systems, and the regulation of private lenders. Labour, welfare, and debt are interlinked in the US, and the lack of regulation in each category mutually affects all others. When someone is laid off, for example, their income-to-debt ratio is impacted. Protective labour market policies would ensure and limit layoffs, while welfare policies would limit the magnitude of private debt. For this transition to take place, the US government, at all levels, would have to adapt and create progressive policies related to corporate governance, health, labour regulation, and financial regulation. Examples include creating a more generous social assistance program and public healthcare options, regulating private lenders to a higher standard, or raising the minimum wage.

Given the projects pursued by the German government and the immediate and short-term impacts on the economy, even in the case of the COVID-19 pandemic, Germany has continued to follow the CME structure. Meanwhile, in the liberal system of the United States, the COVID-19 pandemic has only highlighted the demise of its uncoordinated policies. While US COVID-19 relief packages have been the largest in the country’s history, the measures have not equally supported US citizens. The US needs to establish a more coordinated system that encompasses comprehensive labour market regulations, a progressive welfare state, and a regulation of private debt organizations. Joe Biden’s presidency may bring some of these needed changes to fruition, but more progressive social and economic changes will be necessary to cushion the severe consequences of the COVID-19 pandemic over the long term.

References

Photo by Chris Briggs on Unsplash

[i] Stefan Ćetković and Aron Buzogány, “Varieties of capitalism and clean energy transitions in the European Union: When renewable energy hits different economic logics”, Climate Policy, 16:5, 2016, DOI: 10.1080/14693062.2015.1135778, 646.

[ii] Michel Lallement, “Europe and the Economic Crisis: Forms of Labour Market Adjustment and Varieties of Capitalism,” Work, Employment and Society 25, no. 4,December 2011, doi:10.1177/0950017011419717, 628.

[iii] Lallement, “Europe and the Economic Crisis”, 636-637.

[iv] Peter Hall, “The Evolution Of Varieties Of Capitalism In Europe”, In Beyond Varieties Of Capitalism, 2007. doi:10.1093/acprof:oso/9780199206483.003.0002, 51.

[v] Peter Hall and David Soskice, “An Introduction to Varieties of Capitalism,” in P. Hall and D. Soskice, ed. Varieties of Capitalism, Oxford: Oxford University Press, 2001, 16

[vi] Lallement, “Europe and the Economic Crisis”, 634.

[vii] Jouchim Möller, “The German labor market response in the world recession – de-mystifying a miracle,” ZAF 42, 2010,  https://doi.org/10.1007/s12651-009-0026-6, 335.

[viii] “Protective Shield To Manage The Coronavirus Pandemic – Federal Ministry Of Finance,” 2020, Bundesministerium Der Finanzen, https://www.bundesfinanzministerium.de/Web/EN/Issues/Priority-Issues/Corona/corona.html.

[ix] “Eurogroup Statement On COVID-19 Economic Policy Response – Federal Ministry Of Finance,” 2020, Bundesministerium Der Finanzen, https://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Priority-Issues/Corona/2020-03-17-ecofin-march-2020.html.

[x] “Eurogroup Statement On COVID-19 Economic Policy Response – Federal Ministry Of Finance,”.

Guy Chazan, “Covid Vaccine Would Boost German Economy, Experts Predict”, Ft.Com, 2020, https://www.ft.com/content/ad80499c-0856-4cb0-a9b8-85d22f7d3dd8.

[xi] Lallement, “Europe and the Economic Crisis”, 636.

[xii] Andy Sullivan, and Richard Cowan, “After Months Of Inaction, U.S. Congress Approves $892 Billion COVID-19 Relief Package”, U.S, 2021,  https://www.reuters.com/article/us-health-coronavirus-usa-congress-idUSKBN28V176.

[xiii] James Politi, James Fontanella-Khan, and Ortenca Aliaj, “Why The US Pandemic Response Risks Widening The Economic Divide”, Ft.Com, 2020, https://www.ft.com/content/d211f044-ecf9-4531-91aa-b6f7815a98e3.

[xiv] Ibid.

[xv]Ibid.

[xvi] Ibid

[xvii] Jack Kelly, “There’s A Glaring, Misleading Error In The May Jobs Report: U.S. May Be At 20% Unemployment”, Forbes, 2020 https://www.forbes.com/sites/jackkelly/2020/06/08/theres-a-glaring-misleading-error-in-the-may-jobs-report-us-may-be-at-20-unemployment/?sh=594481e260d3.

[xviii] Mark Blyth, “The U.S. Economy Is Uniquely Vulnerable To The Coronavirus”, Foreign Affairs, 2020,  https://www.foreignaffairs.com/articles/americas/2020-03-30/us-economy-uniquely-vulnerable-coronavirus.

[xix] Ibid.

[xx] Ibid.