Germany is back

The "Germany is back" story was given wings last week with the publication of favorable export statistics, which led to big articles in the Economist (The problem with solid engineering, May 19) and the FT (Germany's exporters are beating the world, May 18).

As the titles indicate, both articles do not take quite the same line. I've struggled to make sense of the incoherent Economist article for a week now, but I think I have nailed it. I'll just give you a few choice quotes:

Saddled with some of the highest labour and tax costs in Europe, German companies compete at the top end of the market by devising excellent technical solutions, supplying reliable goods and building long-lasting relationships with their customers. But the very qualities that enable this—over-engineering, obsession with detail and an extreme emphasis on safety and durability—come at a price: expensive products built to last. These do not bring much repeat business and tend not to spin off many new firms to create additional jobs. Fast-moving mass-consumer markets, ruled by the simplification of products, pushy marketing and dramatic innovation, are much more of an entrepreneurial free-for-all.

Germany's problem is renewal.

Being an entrepreneur in Germany these days is not so easy. The red tape involved in starting a new company, the cost of hiring and firing in a protected labour market, and the stigma that is still attached to those who go into business and fail, complete the picture. In Germany too few companies are being born. Even the successful exporters are increasingly using imported materials or outsourcing much of their production. What is made in Germany is often the work of only a few highly skilled people engaged in an inexorable pursuit of quality and precision.

The anti-capitalist movement has a lot to answer for, says Peter May, a professor at INTES, an academy for family-owned firms in Bad Godesberg. He blames it for engendering a “fear of the future and resistance to new branches of research”. While the Anglo-Saxons developed a dynamic version of capitalism, “We had Karl Marx,” he says.

What is lacking are links between the research done in universities and the small entrepreneurial start-ups that have been the secret of so much development in Britain, America and elsewhere. The big companies work well with the universities.

In Britain in the mid-1980s unemployment was equally high. The slow remedy over a decade was the creation of many service industries. But Germany is still struggling to find a policy mix that might inspire the same level of enterprise.

Even the most outward-looking of Germany's export champions would get a boost if the country's economy grew faster. Professor Sinn believes Germany needs to change course if it is to avoid a total annihilation of labour-intensive industries. The enormous export surplus is damaging, he argues, and to some extent self-defeating. Companies that ignore the home market and concentrate on intermediate goods rather than consumer ones are also missing opportunities.

So, basically, the message is, "yes, Germany is doing well, but it's in yesterday's industries. Quality is so passé, what you need is rapid turnover of glitzy things marketed by 'smart young things'; what you need is more risk-taking, more low paying jobs and more 'growth'."

The Economist notes the disconnect between the successful export sector and the rest of the economy, but ignores it. The FT, more correctly, focuses on this is its article.

It is a well-guarded secret. But in spite of Germany’s unexceptional macro­economic data, no other industrial nation has so successfully harnessed the opportunities offered by an interconnected global economy.

This mid-sized country of 80m, often painted as angst-ridden, risk-averse and allergic to change, has been the world’s largest exporter of goods every year since it overtook the US in 2003.

Global success of this magnitude raises questions. What has led to it? How durable is it? Does it benefit the German economy as a whole? And, in a country where many are uncomfortable with globalisation, what is the impact on society if Germans feel excluded from the benefits.

Another factor in German companies’ success is their regained competitiveness. Thanks to wage moderation, longer working hours and the selective offshoring of low value-added tasks, unit labour costs in Germany have stagnated since 2000. In the eurozone as a whole, they rose by almost 6 per cent.

[Note: the Economist noted this in another article last year...]

The biggest threat of all, however, lies in the decoupling of a successful corporate Germany and the broader German economy. Even in the current recovery, economic growth remains slow by US or UK standards. While corporate profits are soaring, unemployment remains high at above 9 per cent. Among the low-skilled, long-term joblessness has reached endemic proportions.

“You could put this dialectically,” says Michael Hüther, head of the business-sponsored DIW institute. “We are world champions in exports of goods, and we are European unemployment champions when it comes to low-qualified workers. These are the two sides of the restructuring medal.”

“Globalisation has been good for German companies; but it has not been for the economy at large,” says Roland Berger, founder of the eponymous consultants.

On the plus side, recent labour market reforms, and the proliferation of flexible wage and working time agreements between business and trade unions, have made German labour more attractive to producers.

(...)

Globalisation has freed industry from the shackles of domestic conditions. While they lobby the government for more flexible labour laws or lower taxes, managers are now freer to shop around for cheaper labour, easier funding, wealthier consumers and lighter legal frameworks.

Perhaps the biggest challenge for Germany’s leaders is to ensure that the fruits of globalisation are more equally shared while taking care not to undermine companies’ abilities to reap the benefits.

Failure to do so would not only harm the current economic recovery, it could also lead to a breakdown in social cohesion – with far-reaching political implications. Surveys already show that fear of unemployment and declining income are Germans’ top concerns.

So the FT focuses on the right things, and the conclusions it implies (but does not spell out loud) are that:

• Germany is the poster child of globalisation: it is highly successful globally because it has reformed;

• that success is limited to the corporate world, and is not doing much for the German economy. Quite the opposite, it is precisely what makes Germany competitive (more flexibility, stagnant labor costs) that is bringing the economy down;

• thus, "reform" (more flexibility, lower wages, less powerful unions) is probably not what's needed now.

Well, if that last point sounded logical to you, you got it ALL WRONG. Germany, in fact, has not reformed enough!

German companies flee to the UK (May 24)

German companies are considering registering as public limited companies in the UK ahead of possible stock market listings, in order to avoid rules in Germany that give employees a big say in company strategy.

(...)

Volker Triebel, a partner at Lovells, said that the law firm was "talking to several companies, especially in the Mittelstand" (small and medium-sized companies) that are keen to become a plc rather than an Aktiengesellschaft (AG), to avoid falling under Mitbestimmung rules, as they grow. Norbert Winkeljohann, a partner at accountants PwC, said several companies "that view Mitbestimmung as an ogre have approached us".

The law demands that companies with 500 employees or more must give one in three seats on the supervisory board to staff representatives, and that those with 2,000-plus workers give them half the votes.

German companies have long complained that complex corporate decision-making and job reduction programmes can be hamstrung by the supervisory boards' staff representatives.

For an alternate view of Mitbestimmung, go read these diaries from last year by TGeraghty:
Germany's Industrial Relations System at Risk and
Germany's Industrial Relations System at Risk, Part II: The Coming Employer Offensive.

But no:

Merkel urges more labour flexibility (May 24)

Chancellor Angela Merkel on Wednesday demanded more labour market flexibility and fewer rights for workers on company boards in comments that opened new battle lines with Germany’s trade union movement.

Speaking at a DGB trade union federation congress in Berlin, Ms Merkel rejected labour movement demands for a minimum wage of €7.50 ($9.64, £5.12) an hour, and said the system of co-determination, which gives German workers a role in corporate decision-making, should be adapted to “the new business realities across Europe”.

(...)

“I said this in China and I say it here: more people are competing for the best ideas than in the past, and the high standard of living we have achieved can no longer be taken for granted.”

(...)

More than in other recent speeches Ms Merkel stressed the need for “structural reforms” to the labour market, welfare state and health insurance system. “We need change. We must keep what has proven its worth but change what burdens us,” she said.

She called for flexible company-based collective bargaining, incentives for unemployed people to take low-paid jobs, and for sector-specific minimum wage levels instead of a one-size fits all rate. Union proposals for an economy-wide minimum wage system “would not create jobs” but destroy them by making labour too expensive, she argued.

On co-determination she said “other European countries have completely different arrangements” for employee consultation. “We must react to this” she said, signalling that she wants to go further than a joint union-business commission that is expected to propose a reduction in the overall number of seats on supervisory boards.

So, we are getting a push for even more "reform" of the kind Germany has had a high dose of in the past 7 years: lower wages, less rights for unions, less collective bargaining and more local bargaining (which will always be more favorable to bosses than to employees, who can hardly negotiate if the bosses can easily look for alternative workers nearby).

Hooking up Germany to the UK

Which brings us back to the FT article on the leadership of the EU. Germany is now seen as an acceptable partner, now that it is no longer nominally socialist. It is on the road to reform (spectacularly so, it would seem, but this is only tentatively acknowledged as more is needed), it is convalescent and thus must accept the kind hand of the really successful agenda setting reformers (Blair and Barroso) and dump the scary French losers.

Don't believe me? Here it is:

1) France is out (which is pretty much true)

As foreign ministers prepare to meet this weekend in an Austrian monastery to discuss the European Union’s future, relations between Britain and Germany are closer than they have been for years.

(...)

the biggest change in the European political landscape has been France’s gradual disenchantment with an expanding, increasingly liberal Europe, culminating in last May’s No vote in the referendum on the EU constitution.

France still produces occasional European policy papers but Paris is paralysed by political civil war and distracted by next May’s presidential elections. “You might as well forget about France until then,” says one German diplomat.

Daniel Gros, director of the Centre for European Policy Studies in Brussels, says Ms Merkel has yet to work out the terms of engagement with Paris. “There is a search for a relationship there,” he says. But Ms Merkel has made it clear that while Paris remains a vital ally, relations will be less exclusive in future.

Meanwhile, contacts between Berlin and London, both at ministerial and working levels, have intensified since the election of the conservative Ms Merkel as chancellor. The aim? To create a pragmatic, reformist agenda for Europe.

2) One side has won: the "Europe is a big free trade area" side

The new bond of trust between Berlin and London has transformed the atmosphere at European summits. “The arrival of a new government in Berlin helped Europe as a whole and removed the blockade,” says an aide to José Manuel Barroso, president of the European Commission. “We had broken into two camps.”

The common Berlin-London policy agenda is in tune with a more sceptical view across the EU: it focuses on delivering reform, improving Europe’s economic performance and leaving aside – for now – the vexatious constitutional debate.

It is not that Britain and Germany have a monopoly on this agenda, just that Europe works better if its two biggest economies can get along. Mr Barroso believes a functioning London-Berlin relationship will also dampen French opposition to economic reforms.

So what are the underlying components of the British-German policy platform? Both countries are instinctive free-traders – they will push hard for a conclusion of the Doha trade round – and both criticise the resurgence of “economic patriotism” in France. Ms Merkel said in March: “We can only have an internal market when electricity flows freely and when we accept European champions and don’t just think nationally.”

Mr Blair believes the economic reform agenda is in the ascendant and says he wants to work with Ms Merkel – like him, an Atlanticist – on a liberal package of measures that Berlin will promote when it holds the rotating EU presidency in the first half of next year.

Both countries want to rein in EU spending and regulation. Ms Merkel’s call for a 25 per cent cut in EU laws this month was music to British ears.

Economics, "reform", pro-Americanism, forget the Constitution. Sounds familiar? It is. It's called euroscepticism.

3) Blair's secret agent

A key figure is José Manuel Barroso, who sits at the apex of a Berlin-London-Brussels triangle. Mr Blair and Ms Merkel were instrumental in securing the liberal Portuguese his job as head of the EU executive and are his most powerful backers today.

Mr Barroso’s pragmatic “delivery agenda” focuses on areas such as deregulation, energy, research, education and migration – issues promoted by Mr Blair during Britain’s presidency of the EU last year.

(...)

The strong personal relationship between Mr Blair and Mr Barroso was forged during the Schröder-Chirac period, when the Portuguese found himself depicted in Paris as an agent of neo-liberalism. “Blair was Barroso’s oxygen supply,” says one British EU official.

“The fact that Barroso is close to Merkel means he can’t be written off in Paris any more as a British secret agent,” adds Charles Grant, director of the Centre for European Reform.

Today Ms Merkel is a more significant patron, not least because she runs Europe’s biggest country. “There is also a ‘European-ness’ about a German chancellor which you don’t have with a British prime minister,” says one Barroso aide.

That's why Germany is needed: to give legitimacy to this "reform" entreprise. Even its proponents know very well that they have very little of it, so the idea is to hide behind Germany, which cannot be suspected of being anti-European, can it?

To be fair to the FT, they use the remaining third of the article to hedge their bets and reming readers that such a tactical alliance is most likely to be temporary and to fail when real issues get to be discussed again (European budget, institutional reform), especially in a situation where France has a new president and Britain gets Gordon Brown.

But the intent is pretty clear.