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Germany's Surprising Economy Redux

by TGeraghty Sun Sep 11th, 2005 at 07:33:45 AM EST

Good in-depth discussion of issues, from the diaries ~ whataboutbob

The BBC is running a series of articles on Germany in anticipation of the upcoming election.

Whataboutbob diaried about the German reunification process yesterday.

There are also a couple of good articles on the German economy that reinforce some of the points made in the Economist's Germany's Surprising Economy cover story last month:

Despite plenty of good economic news out of Germany, there is still an underlying pessimism about the future:

Could the real German economy please step forward?

The country is the world's leading exporter, selling goods worth 733bn euro ($920bn, £500bn) a year and growing.

Profits at Germany's large companies are soaring.

Business confidence is also improving - several respected surveys suggest company bosses are getting bullish about the future. . . .

At the same time imports have begun to rise again, an indicator, experts say, that domestic demand is on the mend.

Foreign investors, especially hedge funds, are already busy snapping up Germany's undervalued companies and assets, hoping to capitalise on the country's potential for growth.

And yet, after travelling through the country - listening to people, politicians and companies, and following the media - one would assume that Germany is on the blink. . . .

Germany's biggest problem, though, may be of its own making.

"We Germans are world class whingers," says Dr Rainer Hecker, boss of Loewe, a high-end consumer electronics firm in Bavaria.

His words are echoed by many business people. If only consumers and entrepreneurs would stop moaning and buy, invest, take risks instead.

A recurring theme -- German firms have had success in improving competitiveness by bringing down labor costs:

Over the past few years radical welfare reforms have changed the country's labour market beyond recognition.

Tales of Germany's high wages and short working hours are just that - tales.

Real wages have fallen dramatically and working hours are nearly back to 40 a week - to the point where some employers say they don't see much difference between the cost of hiring a German or British worker.

Cooperative relationships between business and labor have helped this process along:

Trade unions negotiate deals with flexible hours and lower wages, tailored to the needs of companies under competitive pressure.

"I have to discuss such deals with nearly all companies in our region," says Juergen Apfel, regional organiser for the IG Metall trade union in Coburg, a depressed region in Northern Bavaria.

What inflexible labor markets?

Of course, the unions don't have much choice, given the increased bargaining power business has over them:

. . . these days German bosses have stopped playing Mr Nice Guy.

In the search for profit and faced with global competition, they are squeezing suppliers, axing jobs and shifting production to low-wage countries like never before.

This week Volkswagen announced that its German workers are just too expensive. Thousands of jobs are likely to go, Portugal may benefit. . . .

Many workers . . . face the downside of globalisation.

"During the past few years more and more firms are coming to us and warn 'production will be moved if wages don't come down'," says Michael Ebenau, a regional organiser with the IG Metall trade union in Jena. . . .

In the hope of persuading companies to stay here, the government has lowered labour costs and made it easier to hire and fire.

And workers are getting the drift.

"When people tell you "do this, your job is at stake', you'll do it. I'm happy to make sacrifices as long as I keep my job," says Silke Tischer, a union official at Corning's threatened Neustadt plant.

This shows that the current economic recovery strategy is clearly self-limiting, however. Lower labor costs may mean higher profits and greater export competitiveness for large multinational firms, but the core of the German economy - consumers and small-to-medium sized firms - are still in a funk:

Earlier this year, the number of jobless reached a post-war record of 5.2 million. Every day, says the opposition, another 1,000 jobs disappear.

Over the past five months unemployment rates have improved slightly, but in some regions - especially the East - unemployment is still well above 20%. . . .

Real wages have fallen dramatically and working hours are nearly back to 40 a week . . .

Unemployment [and falling wages are] hitting both consumers' confidence and their purchasing power.

As they tighten their belts, Germany's savings rate has reached a staggering 11%. . . .

It is a vicious circle: consumers stop spending; retailers bemoan empty shops.

In particular, weak domestic demand hurts the small and medium-sized enterprises that are the backbone of Germany's economy - its famous Mittelstand.

Many of these firms now cut jobs and invest less. With eight out of 10 employees working for Mittelstand firms, consumer confidence takes yet another plunge.

So the very labor market flexibility that is contributing to (big) business optimism is also increasing economic insecurity for workers and consumers, limiting consumption demand, and thus dulling the incentives of the Mittelstand firms to invest and create jobs. The only thing that is driving the German economy right now is export demand. Domestic consumption and investment are still weak.

If there is one long-term ray of hope, however, it probably lies in the innovative high-tech sector, where the demand for quality, skilled labor, and proximity to the customer make jobs difficult to send out of the country:

Technology-intensive firms like Dr Bergner's [a small firm in the East specialising in vacuum technology] - and thousands like hers - are actually expanding. . . .

Many customers . . .need bespoke vacuum components and come to Vacom, which expands to fill the profitable niche.

But to stay competitive, she says, "we have to invest all the time... and work as effective as possible". One example: a computerised logistics system packs 450 square metres of storage space on a 20 sq metre footprint.

On a much larger scale, Jenoptik has a similar approach. . . . the new Jenoptik specialises in laser tools, precision optics and sensor technology.

Every year the company invests up to 10% of turnover into research and development. . . .

"As a high-tech company we've got everything in place to be successful," says Alexander von Witzleben, the boss of Jenoptik. "Germany is more competitive than ever before."

"I can't and won't complain about our situation. Working hours (in Eastern Germany) are longer and wages lower than anywhere else in Western Europe," he adds.

The French multinational Saint-Gobain is expanding the town's industrial ceramics factory.

Part of the investment package was a lengthening of working hours from 38 to 40 a week. . . .

The key to Roedental's success, though, is the know-how of its workforce.

"Workers need so much experience and training to get the product right, we can't just go to China with this business," says Brigitte Wirth, who looks after Saint-Gobain Ceramics' marketing.

A few valleys away, in Kronach, consumer electronics firm Loewe tries a mixture of flexibility and innovation to stay competitive.

To sidestep the flood of cheap television sets and DVDs from Asia, the 80-year old company has long been pitching for the high-end premium market.

. . . Loewe's boss Dr Rainer Hecker and the IG Metall trade union hammered out a package of lower wages, flexible working and job cuts.

. . . Loewe's flat screens are now all the rage. . . . even though most of Loewe's electronics is designed, manufactured and assembled in high-wage Germany . . .

How does Loewe do it?

"We have to innovate all the time", says Dr Hecker, and by keeping design and manufacturing under one roof "we can implement innovations straight away", while being in Europe makes it easy to produce bespoke television sets for customers. . . .

The Czech republic may be just 45 minutes drive away, but "even if Czech workers are paid half the salary and I save 2.5% of costs, with the extra logistics and drop in quality, it's just not worth it to relocate," says Dr Hecker.

What is "the common thread of these stories"?

Standardised mass production is rarely competitive in Germany.

Customisation and cutting-edge technology are the keys to success.

Only one problem, though:

. . . it doesn't add up to a huge amount of new jobs. "Labour costs are not that much of an issue" . . . "In the end wages are just a small fraction of the equation."

It's Germany's time in the spotlight right now, what with the upcoming elections...thanks for posting this!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Sat Sep 10th, 2005 at 10:15:33 AM EST
I wonder if the reunification phase is nearly over. If you elect an East German chancellor, and are ready to start using East German labor to reduce costs, perhaps you have a society now that has accepted the social impact of reunification and is now ready to take advantage of the long-awaited benefits.

Germany seems to be in a pretty good situation right now...

by asdf on Sat Sep 10th, 2005 at 10:55:41 AM EST
As you point out, most of the arguments "praising" Germany are those that emphasise cheaper and more flexible labor.

Le Monde has a slightly more interesting comment in their week-end edition, pointing out, in the same line, that Germany is doing the reforms that France is not, but also underlining that Germany's specialisation in high-end, technology rich, less price sensitive puts it in a much better position to face world competition.

what I would like to flag is the point that "labor is a small part of costs", which is an important insight, which means that if we do transport or organisation or distribution or marketing better than the Chinese, we will still be competitive because labor costs are only a small part of competitivity, and thus cheaper labor changes little in the overall cost of complex products. The lesson: focus on complex products that require more than just cheap labor, and then you WILL be competitive, and you CAN pay people well.

Why on earth would we want to keep the back breaking jobs in textile if we can have people do much more interesting and rewarding things. What we need most of all are social policies to accompany, help, and if appropriate retrain the people that did these jobs in our countries so that they do not may alone the price of technical evolution and globalisation. They are freed to do something else, and we must help them to do so.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Sep 11th, 2005 at 05:26:06 AM EST
1.   underlining that Germany's specialisation in high-end, technology rich, less price sensitive puts it in a much better position to face world competition.

I agree.  Germany, and for that matter any future oriented nation, should focus at high-end technology rich enterprises.  The future is in genetic engineering, molecular biology, biotech, space exploration, internet, information technologies, etc., not in cattle, textile, construction.

We are in an information age, not in the industrial or agricultural age.  

2.   we do transport or organisation or distribution or marketing better than the Chinese, we will still be competitive  

I disagree, in part.  The operative word is "we."  Chinese can always hire or partner with "us" or a German company to do the marketing, transport, organization, distribution.

Yet, you are right, because all of the above deals with information.

3.  Germany is # 19 in the latest Economic Freedom Rating by Cato Institute (for the year 2003).  

And must move up, if it intends to be competitive in the future.  

4.  Sadly, nobody in Germany (and only a few in the USA) is talking about abolishing the income tax .  

You can't punish success and expect more success.

  1. Fortunately, Forbes's Flat Tax is taking a big hold (its the second best choice) in the former USSR.   Estonia is # 9 in the Economic Freedom Rating. Latvia and Lithuania share the spot for #44/45.  A huge jump considering these nations were under state controlled economies just recently.  France is # 38.  

  2.   I did not see any plan to radically alter its labor market regulations.  I suspect they will do minor  tinkering on the edges.  Hiring and firing should be left to private contracts and personal choices, not to the state.  But no socialist will agree, and no conservative in Germany has the guts to utter the word.

So, be it.
by ilg37c on Sun Sep 11th, 2005 at 05:02:45 PM EST
[ Parent ]
Axel Weber, president of the Bundesbank and member of the governing council of the ECB, gave an interview to Ashley Seager in The Guardian yesterday.

What does he think about signs that the German economy may be reviving?

He is also keen to calm recent speculation that the German economy might sudden re-emerge as an economic powerhouse. The optimism has been kindled by signs that investment is growing and that German corporate profitability has increased on the back of extensive restructuring by firms which has improved their international competitiveness by driving down costs.

Indeed the only thing holding the German economy above water in the past year or two has been exports.

"I agree that there have been some positive signs recently. We could be at a point in the business cycle where the strong export orders spill over into domestic demand, particularly investment demand," he says, but adds that if these are to translate into dynamic growth in the medium and longer term, Germany needs to continue down the reform path it launched a couple of years ago.

Note that business cycle. If the German, and more generally eurozone, economies move into a faster-growth phase, I predict we'll be hearing it again from journalists and pundits and "experts". (Germany and France are doing better, the "Anglo-Saxon" economies are stalling? Oh, that's just a natural movement of the blah blah business cycle blah blah doesn't prove anything blah blah.)

But has monetary policy anything to do with Germany and the eurozone's sluggish growth? Mr Weber says nein:

Current interest rates are appropriate for the euro area.

Well, did Gordon Brown and the Bank of England do a better job with the pound?

the British economy has been doing well over recent years and ... our colleagues at the Bank of England have been able to deliver a degree of price stability that is conducive to growth

Oh, so maybe he's politely saying that the UK's monetary policy has been rather better adjusted than the eurozone's...

More than that, he thinks Britain has been getting everything right. Just look at those unemployment numbers... Below 5% for the UK, above 11% for Germany...

Well, has UK growth not been a bit debt-fueled? He doesn't say, and Ashley Seager doesn't ask him. But

He is not unduly concerned about the threat from the housing market, observing that house prices seem to be stable rather than falling.

Well, Germany has (had) a lot on its back with re-unification, hasn't it? Well, yes.

This alone explains two-thirds of the country's underperformance over the past decade, he adds.

But nothing specific about monetary policy (see this excellent Jérôme comment) explaining a fairly long-term ball-and-chain effect on German and surrounding economies; and nothing to the effect that Germany's 11% unemployment is an average weighed down by 18% in former East Germany.

So why does Weber think the UK is doing well and Germany poorly?

"The long-term growth potential of an economy very strongly depends on having flexible and dynamic labour markets because that's the key driving force for household incomes and therefore consumption decisions, and for investment decisions for firms. "This puts Britain in a good position to cope with the challenges of globalisation," he adds <snip>

"The labour market is key. In Europe we need to have more flexible labour markets and more structural reforms." <snip>

Some key decisions have to be taken after the election which will influence future events," he says.

Ah, now we've got the agenda.

(I thought it was dangerous for central bankers to be influenced by politics, but I must have missed something as usual).

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Sep 11th, 2005 at 11:13:10 AM EST
Spot on again. I am getting annoyed at seeing the same points mindlessly repeated over and over. The central banker, i can at least understand, it can easily be considered part of his job. Journalists hould know better.

In my recent post about Toyota creating jobs in France, I noted howx they were using a combination of one third full time unlimited jobs, one third limited duration jobs, and one third temps. That allows for more than just a little bit of flexibility...

As a matter of fact, big business is actually pretty happy with the 35 hour law, as it made the 35 hour count not on a weekly basis, but on a yearly basis. Thus it became a lot easier for them to organise work around their busiest season, or to have night and weekend shifts.

I remember reading that following these reorganisations (and to deal with the success of its 206 and 307 models), Peugeot was working its factories at 110-120% of their designed capacity thanks to smart organisation of labor - and there were enough volunteers for the week-en or night shifts (where they only had to do 30 hours or so as compensation for the tough timetable) that it was organised pretty preacefully labour wise.

So let's stop these stories about inflexible labor rules - at least for big companies.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Sep 11th, 2005 at 05:05:19 PM EST
[ Parent ]

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