Locomotive runs out of steam Germany, once Europe's paragon of industrial and social organisation, is being pushed towards a Blairite revolution
David Gow, industrial editor Friday April 26, 2002 The Guardian
Günther Klemm believes that the German industrial model is ailing. The chief economist at the Hamburg chamber of commerce is not alone. "The state can no longer finance everything, especially the indirect costs, which bring people to rely entirely on the state, and that's the German sickness," he says. "Everything is socially thought-out but has an unsocial impact; the state wants to protect everyone but achieves the opposite."
He is critical of the failure of the Schröder government - and its predecessors - to reform and modernise the tax system, labour market, pensions and social security system, to stimulate growth and employment and restore Europe's biggest economy to its leadership role.
Germany, once admired for its economic miracle, its macroeconomic stability, superb education and training system and consensus-driven society, is now derided as the sick man of Europe, the brake-wagon rather than the locomotive.
For the past 10 years, since the boom prompted by unification, it has been bottom of the European growth league, averaging 1.5% a year. Last year growth was 0.6%, unemployment topped 4m or almost 10%, inflation was 2.5%, corporate confidence fell to an eight-year low, investment in plant and machinery dropped 3.4%, private consumption, despite the impact of the tax cuts of 2000, rose less than 2% and productivity grew a paltry 0.4%.
In the five new federal states in the east, which have received the equivalent of 1.3 trillion marks in the past 10 years in financial transfers - equal to 3.5% of GDP a year - unemployment is officially almost 20%, productivity two-thirds of the level in the west, per capita GDP 60% of western output. Personal disposable income is about 80% of western levels.
This year, Hans Eichel, the finance minister, is forecasting 0.75% overall growth. The country's six leading economic institutes said this week that it should reach 0.9% (and 2.4% in 2003) - lower than the 1.3% they predicted last autumn but equal to the recent IMF forecast.
Dealing a further blow to Gerhard Schröder's desire to see unemployment falling rapidly before the September 22 general election, the institutes said it would average 3.96m this year and 3.81m next. Even that depended on a peaceful outcome to the current wage negotiations.
On the streets, members of IG Metall, the union representing 3.6m employees in the engineering sector, have been staging token strikes in pursuit of an original 6.5% pay claim. After talks broke down, the day after chemical workers accepted a 3.3/3.6% offer, the union set in train a national strike ballot and demanded at least 4% as the price for a settlement.
That upset government and independent assumptions that the unions, responsible for a mere 1% rise in unit labour costs in the past two years, would reaffirm "social peace". Underlining the country's fall from macroeconomic grace, the European commission forecast that Germany's budget deficit would hit 2.8% of GDP this year, just below the 3% ceiling set by the EU's stability and growth pact.
So the former paragon under the magisterial guidance of the Bundesbank is likely to receive another "yellow card" from Brussels after the one issued (and withdrawn) over the 2.7% deficit in 2001. The institutes take a more optimistic view, foreseeing a deficit of 2.3% this year, 1.6% in 2003 and 0.5% in 2004.
In the eastern part of the country, where the mood is sullen resignation, the construction boom unleashed by unification has turned into a slump, dragging down manufacturing output - which nevertheless showed some signs of recovery last year, especially in states such as Saxony where car firms such as BMW and Porsche are building new plants.
Unemployment is so high that a new wave of emigration to the west has begun after dwindling from 169,000 in 1991 to a trickle five years later. In Schwerin, capital of Mecklenburg-Vorpommern, Gerd-Rüdiger Reichel, head of economic and structural policy at the economics ministry, says a net 5,000 left last year and 2,600 are likely to go in 2002.
In the state, where the economy shrank 0.8% last year, unemployment is officially 19.4%. But Mr Reichel admits that job-creation schemes keep 50,000 - a further 5-6% - off the register, pushing the effective rate to a quarter of the labour force.
There is widespread disagreement about the scale of the country's sickness, and the required therapy and the willingness of the country's 83m citizens to take the treatment.
Klaus Zwickel, IG Metall's leader, insists that a substantial pay increase is necessary to stimulate domestic demand in an economy where growth is spurred by exports, in turn promoted by the US recovery and the weak euro. Economists such as Mr Klemm agree that personal disposable income in Germany has almost stagnated in recent years, with the impact expected from the initial stage of tax cuts offset by the new eco-tax on petrol, for instance.
There is surprising agreement from Hans Rath, chairman of the chamber for small businesses in Münster, who sees a drop in people's purchasing power as responsible for firms' woes. But there the agreement ends as Mr Rath, in common with the heads of most small and medium-sized businesses, wants root and branch reform of Germany's "encrusted" labour market and social security/tax system.
Industry, big and small, is angry that the state takes 55% of GDP (compared with 42% in Britain). It wants the tax system simplified, with the top rate reduced to 35%, and the unemployed and those on social security benefits forced to accept lower-paid jobs or see their payments cut/cancelled after a strictly limited period. It wants the law protecting employees against dismissal changed and the power of unions, who have lost 4m members in 10 years, substantially reduced.
In short, it wants a form of Thatcherism or even Blairism that will make Germans more flexible and mobile, willing to give up jobs for life, take on more risks and more responsibility for their health and pensions.
But Germany is a risk averse country and the mood is one of insecurity, prompting people, including the dramatically growing number of retail shareholders hurt by the dot bomb collapse, to save for the future rather than invest or spend. Working east Germans, a fifth of whom are in part-time jobs or on short-term contracts, claim they cannot see any benefits from the greater flexibility they have shown.
"I believe it will have to get worse here before it gets better," says Mr Klemm. "But politicians underestimate the willingness of people to accept substantial changes which, if carried out consequentially against all protests, would go through." Bernd Fischbeck, managing director of RCN, marketing consultants, is gloomier: "It'll take 10 to 20 years, an entire generation."