In 2005, The Economist had called Germany ‘the sick man of Europe’. It still smarts when it remembers that. Today, Germany is indisputably the strong man of Europe. Even France has acknowledged that (a very hard thing for Frenchmen to do) and Sarkozy’s message to voters is to try and become as strong as Germany.
There is nothing magical, nothing self-evident, nothing miraculous that brought about the change. Just the right policies that cost Gerhard Schroeder, the former Chancellor, his political life. Today, the 2006 reforms are bearing impressive fruits.
Last week, I was one of a group of journalists from all over Europe who were guests of the European Academy of Berlin on a study tour and had face-to-face meetings with some of the highest authorities in the country. Some are far too important to be mentioned, while among other visits, we met people from the German government, from the parties represented in the Budnestag (twice), from advisers to Chancellor Merkel, and, in Frankfurt, the ECB, the Bundesbank and Deutsche Bank.
In this article, I give a short explanation of what was presented to us (at least, this was on an On the Record basis) by Dr Volker Treier, Deputy Chief Executive and Head of the International Department at DIHK, the association of German Chambers of Industry and Commerce, which has 80 member chambers in Germany itself and more than 120 spread around the world (there isn’t one in Malta but one is being opened in Libya).
Among the decisions reached by the country under Schroeder in 2006 was one to keep labour costs as low as possible.
Thus (see table 1), keeping 2000 as the base year, we can see how Germany was the only country that kept its unit labour costs lowest. The UK, US and Spain saw their labour costs rise by 30 per cent, the French by 20 per cent.
The issue Germany faced up to when it came to the reform was: either keep labour costs down or else see factories and business move abroad.
Some say today that Germany had the opportunity to conduct its own reform at a time of relative calm in international markets, but that’s only one side of the coin, for this reform was carried out during the darkest night of the German business cycle.
The results are there to see – Table 2 shows youth unemployment as of last January: Germany with 7.8 per cent, Austria with 8.9 per cent and Malta at 9 per cent while Italy has 31.1 per cent, Greece 48.1 per cent and Spain 49.9 per cent. Total unemployment today is just above 6 per cent even though German tax rates at 38.65 per cent are just above Malta’s at 35 per cent and preceded only by Japan and the US.
There are other contributors to the German miracle: wage bargaining is conducted in sectors, not in individual companies; and there are no two unions fighting for membership by seeing who can get the highest salary. And the government keeps out of the negotiations.
Germany has a higher manufacturing share than, for instance France. Although energy prices in Germany are among the highest in Europe, (with some structural problems now that nuclear stations have been shut down) but energy is used as efficiently as possible, with only Japan being more efficient.
When one talks of the German economy one focuses on industry in Germany, but there are also many German companies operating in the world. They tend to invest in countries and areas where there are high growth rates – such as Sao Paolo in Brazil for instance which has been called the biggest German city in the world.
Investment is crucial – it had dipped to -30 per cent during the crisis and is now at +30 per cent.
Costs are held down, sometimes by moving production facilities abroad, more than by market development or sales or customer service.
It is with such policies that Germany has retained its trading volume (actually, Germany is both a giant inside Europe but also a giant outside it, holding its own against the US and China.
This explains now why Germany is firmly set in its opinions as regards the euro and the euro-weak or euro-delinquent countries. For all the pleas to ease the austerity drive, for adding growth to EU policies, for a Marshall Plan, Germany offers austerity and ‘consolidation’. Get your costs down: those wage increases were never justified. Get your deficit down. Get your debt down.
If the euro-weak countries such as Greece want more money, they should see about getting those huge EU structural funds which are there but which they never seem to be able to get (while other countries do get them).
In recent months, Germany too has begun to see some worrying signs. Germany, as said, has quite a few serious energy issues – quite surprising in a country at the forefront of technology.
There could be the beginnings of a housing bubble. Last week saw (very unusual for Germany) strikes at airports for a 6.5 per cent wage claim. There are also some signs the economy may be overheating. All these are signs that, if nothing else does, impede Germany from being open to all the siren voices urging it to open up its coffers to help the Greeks, the Portuguese and the like.
As I explained in another article this past week, Germany has now understood that its position is right at the centre of the euro and that the euro is its future. There is no better alternative to other countries taking the German medicine, which Germany itself took before they did. Germany has no intention of playing Santa Claus to the Mediterranean countries.
There is so much more to report from this study tour, which I intend to explain over the coming days. But, as I said, the best briefings were those under what the Germans call ‘Unter 3’ rules – that is, those in which neither the speaker nor quotations can be reported.
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