BERLIN -- The long row of precision computer-controlled milling machines stands silent and almost inactive on the floor of Klaus Reucker's metal-parts factory in Spandau, on the edge of Berlin - a sad testament to the crippled economy.
When parts orders from automotive and construction-equipment companies slowed to half their normal value earlier this year, Mr. Reucker knew his sales could no longer support all 41 employees, most of them skilled machinists. Half of his big machines fell silent, and the workers waited as he drew up a plan for layoffs.
That, for him, was heartbreaking: He had worked his way up from the assembly line to owning his own small company, and considered the workers his friends. To cast them into the murk of joblessness in the midst of a recession went against his principles.
As it turned out, Mr. Reucker never had to carry out the firings, even though his orders are still paltry enough that half of his huge machines remain silent.
Like thousands of other German companies, Mr. Reucker's shop has struck a bargain with Chancellor Angela Merkel's government: He will pay his 10 unneeded workers one-third of their salary for six months, after which Berlin will pay them, at 60 per cent of their original wage, to stay on the company's employment roster as part-time workers whether they work or not.
Germany now has close to 1.5 million workers employed on this scheme, known as the kurzarbeit, or "short work," at a cost of $9-billion to the government and $7.5-billion to German companies.
While other countries were bailing out major companies by purchasing their shares and debt or taking ownership stakes, the German government took a different tack this year, bailing out payrolls instead, in order to keep layoffs and large-scale unemployment at bay and stave off the personal bankruptcies and home foreclosures that would result.
The result has been a political dividend for Ms. Merkel, whose ruling Christian Democrats face a Sept. 27 national election. In 2005, she was swept to office after a sharp rise in unemployment levels forced then-chancellor Gerhard Schroeder, a Social Democrat, to call an election.
This time around, she can boast that unemployment has held steady for two straight months, at 7.7 per cent, below the Eurozone average of 9.5 per cent. Without the kurzarbeit, Germany would have seen unemployment rise.
It has also turned the attention of world governments to Germany, where some forecasters believe the economy is recovering faster than among its neighbouring countries. If growth can resume next year, Ms. Merkel's payroll-boosting scheme will have paid off, saving the country from the worst effects of the downturn.
In neighbouring countries such as France and Britain, forecasters warn that a recovery in economic activity is likely to be followed by a sharp spike in unemployment, which could pull the whole economy back down. The German model, despite its large fiscal cost, suddenly seems tempting.
"It is a kind of a gamble," says Eugen Spitznagel of the government labour-market analysis institute IAB. "We have evidence that there are large levels of labour hoarding [companies holding on to workers they do not need]," and if the economy does not expand, it could lead to a crisis."
But Mr. Spitznagel has co-authored a study that shows the gamble appears to be paying off. In a large-scale survey of firms, it shows that layoffs will be balanced by equal numbers of hires during the next 12 months. Other recent studies have shown a sharp rise in investor confidence and a return of consumer spending, leading many economists to predict that Ms. Merkel's investment in the labour force will pay off.
But the stakes remain high. If growth remains stagnant beyond the end of 2010, Ms. Merkel will be caught with millions of workers on the government payroll, and will face either a massive wave of sudden layoffs, or the need to put those workers on more or less permanent state semi-employment. As Germany is already facing government debt levels approaching 70 per cent of the national economy, both options would be devastating.
This has led a number of German figures to warn that the kurzarbeit is a form of economic Russian roulette.
"The massive use of kurzarbeit has led to a backlog of job cuts," Axel Weber, president of Germany's national bank, the Bundesbank, warned this summer. And Ralph Wiechers, chief economist of Germany's engineering organization, warned that "kurzarbeit is a sweet poison," one that is causing German companies to become addicted to levels of employment they can't afford on their own.
But the more optimistic predictions held by most economists have caught the attention of other European nations. Ms. Merkel's policy is, in many ways, a complete reversal of everything they have been doing for the past decade and a half.
As recently as 2008, Germany was widely described as a country with a dangerously flawed set of labour laws. Other countries, such as neighbouring Denmark, had adopted "flexicurity" systems that allowed companies to hire and fire workers quickly and easily and provided robust short-term unemployment insurance schemes to support people at close to full pay between jobs.
In Germany, it remained expensive and difficult to fire full-time workers. This led to a German unemployment rate far higher than other Western European countries, as companies avoided taking on workers who would become long-term obligations.
But now that conservative system appears to have saved the German work force from a difficult time in the woods. Employers are doing everything they can to hold on to workers, even though the kurzarbeit program is somewhat more expensive than the cost of a layoff, because they believe that it will be hard to find qualified workers when the economy picks up again.
"The larger problem for Germany, once this period of recession is over, is not unemployment but labour shortages," says Mr. Spitznagel, who points to his country's aging population and ultra-low birth rates.
"Last year, the size of the labour force shrank by 150,000 workers - that is what is on employers' minds."
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The unemployment effect
While other countries were bailing out major companies, Germany bailed out payrolls instead in order to keep unemployment low.
France: 9.8%
United States: 9.4%
Canada: 8.9%
Germany: 7.7%
THE GLOBE AND MAIL
SOURCE: EUROSTAT, STATISTICS CANADA
