At the time, the country was still recovering from the high costs associated with its reunification and its conversion rate was widely considered to be overvalued.6 The national policy response was a prolonged period of union-backed wage moderation7 together with a significant labour market overhaul which aimed, among other things, at improving job search efficiency and employment flexibility.8 The result was striking: from 1999 to 2008, nominal unit labour costs were virtually unchanged for the economy as a whole (see Chart 8) and were thus growing significantly below what the “golden wage rule” would suggest.9 This resulted in a strong export performance, but weak domestic demand.
The economic policies Germany pursued before the crisis largely explain why it emerged relatively unscathed from the Great Recession. Exports recovered swiftly and currently stand at an all-time high, roughly equalling half of the country’s GDP. Exports recovered particularly strongly towards non euro area countries. As a result, the decline in the euro area share in total German exports accelerated.