-Caveat Lector- http://www.guardian.co.uk/germany/article/0,2763,908282,00.html Europe's powerhouse in crisis
Unemployment up, growth down and a deepening rift with America: the first of a two-part report on a troubled nation Larry Elliott Thursday March 6, 2003 The Guardian Germany is Britain in the 1970s. Germany is about to go the way of Japan. Germany is the sick man of Europe. You pay your money and you take your choice. One thing is for sure. Germany is not what it was, and the Germans know it. "It's very difficult to find workers with the traditional German values," says Horst Schmidt, general manger of Gerb, an engineering firm based in Berlin. "After the second world war, one of our strengths was that Germans worked very seriously and it was easy to arrange new things. Now it's more important for young people to go to the disco and make plans for the weekend." Little more than a decade after the euphoria that accompanied the demolition of the Berlin Wall, the sense that Europe's largest economy is on the edge of a severe crisis has gripped the country's political class. Unemployment figures today will show the jobless total heading towards 5m, putting pressure on the government of Gerhard Schröder just five months after it won a second term on what the voters now see as a false prospectus. Songs lampooning the chancellor have appeared in the German charts. Workers disgruntled at the increases in taxes have been sending the government the shirts off their backs. More worryingly for Mr Schröder, economic weakness has translated into political weakness. The German chancellor had to suffer the indignity of being labelled "old Europe" by Donald Rumsfeld, George Bush's defence secretary. For old, read old and weak. The jibe would have been shrugged off at the time of the last Gulf war, when Germany's economy was booming after the end of the cold war. No longer. Some of the gloom has to be put into context. Germany has not had a winter of discontent, nor has the IMF yet arrived to take charge of the economy. As Hans-Olaf Henkel, the former head of Germany's leading employers' group, the BDI, puts it: "Germany is not Britain in the 1970s. The quality of the workforce is good, there's plenty of innovation, we still have very strong industry, German companies are still very successful abroad." By the same token, the British visitor to Germany might well wonder what all the fuss is about when concern is voiced about the state of Germany's schools, health service and autobahns. Miracle into decay High levels of investment were possible in the public sector during the "miracle economy" years of the 1950s, 1960s and early 1970s. But the slowdown in the economy over the past decade has meant that Mr Schröder is facing the sort of choice faced by Westminster governments regularly during the postwar period - cut spending, raise taxes or let borrowing take the strain. "Germany's infrastructure is decaying and needs repair. You wouldn't think it was one of the richest countries in the west," says Andreas Botsch, executive secretary of the DGB, Germany's biggest trade union federation. The downward trend in the economy has been clear for some years. After growing by 8% a year on average in the reconstruction decade of the 1950s and 5% a year in the 1960s, Germany has sputtered to a virtual halt since the reunification boom of 1990 and 1991. In only two years since 1992 has the economy grown by more than 2%; in 2001 it expanded by 0.7%, last year by just 0.2%. This year, with consumers reluctant to spend, and exports choked off by the state of the global economy, looks like being another dud. Unemployment shows no sign of levelling off, and weak growth means that Germany is once again likely to breach the 3% limit for budget deficits set by the EU's stability and growth pact. This, for Germany, is perhaps the ultimate humiliation. The stability pact was the price demanded by Germany for monetary union, and was seen as a way of preventing spendthrift countries from circumventing a single interest rate by running big budget deficits. Now, Berlin is being forced to take measures to bring Germany's deficit back below the ceiling. Explanations for Germany's economic woes fall into three categories. The first, favoured by the country's finance minister, Hans Eichel, is that reunification was a costly burden that is draining funds from the public coffers and acting as a brake on growth. The subsidy to what was once East Germany still runs at €75bn a year; everybody agrees that the legacy of reunification is still hobbling the economy. When faced with the argument that Germany needs a Margaret Thatcher figure to promote radical reform, Andreas Botsch says: "Britain has never had to swallow an eastern part of the country. This is what distinguishes Germany's problems from other countries'." The second thesis is that the country is in need of structural reform so that it becomes easier for firms to hire and fire, less expensive for companies to do business in Germany, and less burdensome to find a way through red tape. "We need less bureaucracy, lower taxes and a more liberalised labour market," says Mr Henkel. "The most important thing is to loosen the grip of the unions of German society. We have laws which give the unions in Germany extraordinary power." At Gerb, a typical German mittelstand (middle tier) company with 150 employees, Horst Schmidt says the structural problems of the economy are worse for big companies such as Siemens and Volkswagen than for firms such as his, but agrees that reform is long overdue. "It is hard to get rid of new workers, even if they are not very good. We look very closely at whether we need an extra worker and whether it is the worker we want. We used to have drivers and people whose job it was to go out and get the breakfasts . That doesn't exist any more. Wages are too high and social contributions are too high for that." Cocktail of problems Finally, there are those who argue that far from being caused by problems on the supply side of its economy, Germany is suffering from a lack of demand caused by locking itself into the euro at too high an exchange rate, being saddled with interest rates that are too tight for an economy growing slowly, and making matters worse by trying to cut the budget deficit during a period of sluggish growth. The DGB's Mr Botsch says there is a clear link in Germany going back 30 years between level of real (inflation adjusted) interest rates and growth. "We need lower interest rates and expansionary fiscal policy. Eighteen months ago we told Eichel that if he put the squeeze on expenditure at a time when the economy was slowing down you would end up in a debt trap. That's exactly what he has now. "Eichel is becoming a problem for the economy. He is about to drive the economy into deflation." Coping with this cocktail of problems would be problem enough for even the strongest of governments, and Mr Schröder's authority, sapped by the state of the economy, has now been undermined by the opposition gaining an effective veto in the upper house. His much-touted package next week looks like being a compromise. Mr Botsch says that the unions are prepared to talk about changing Germany's employment protection laws (EPL) but not at any cost. "Employers are saying that EPL is an obstacle to hiring people especially for small companies. If they can prove it let's change the way of having EPL. But we will never get rid of it completely. That's one of the fundamental tenets of the social market economy." In the meantime, the noose is tightening round the economy. The banks, nursing big losses from investments in the east and the dotcom crash are trying to boost their profits by charging higher interest rates for their business customers. The prospect of a credit crunch, in which dearer money leads to more bankruptcies and bad debts for the banks is what prompts fears of a Japanese-style financial crisis several years down the road. Mr Eichel claims that he will let borrowing take the strain if growth undershoots this year. But he will go down as the Herbert Hoover of Germany if his adherence to the stability and growth pact - dubbed the stupidity and gloom pact - pushes the country down the path towards deflation. Heiner Flassbeck, who once worked for Mr Schröder's first finance minister, Oskar Lafontaine, put it this way: "A sharp fiscal restraint, as planned by the new government, could quickly destabilise the economic situation further, leading Germany from the sick man to the dead man of Europe." 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