Germany is doing a Japan: Stricken giant holds back Europe's economy
By Brian Groom
Published: November 15 2002 21:25 | Last Updated: November 15 2002 21:25
This ought to be Germany's hour. Twelve years after the fall of the Berlin Wall, the country that has been the chief proponent and potential beneficiary of enlargement will shortly be at the centre of a 25-member European Union - its biggest country with 82m people, generating a fifth of its gross domestic product. It could be immensely powerful.
Enough, one might have thought, to fuel latent fears of an over-mighty Germany that would impose its own priorities on its EU partners. Instead, Germany finds itself increasingly pitied rather than feared.
It is seen as a stricken giant, the sick man of Europe, that has lost its way as a wealth-generator and has yet to work out how to articulate its international role. The "German problem", which recurred for the best part of two centuries, is back - but this time, unusually, the German problem has economic weakness at its heart.
Each day brings dire headlines for Chancellor Gerhard Schröder. Less than two months after his Red-Green coalition was re-elected on a promise of no new taxes, he is being pilloried for raising both taxes and social security contributions in a bid to plug a gaping budget hole.
Seasonally adjusted unemployment, already 4.12m or 9.9 per cent of the workforce, is rising. Tax revenues this year are expected to be €15.4bn ($15.3bn) lower than forecast only six months ago. The economy is hovering on the edge of a second recession in less than 12 months. The government's panel of independent economic advisers says GDP will grow by just 0.2 per cent this year and 1 per cent in 2003.
The advisers warn that the government's flagship labour market reform, the Hartz commission proposals to streamline job placement, are inadequate. Business leaders say concessions to the trade unions have neutered them. Even Peter Hartz, the Volkswagen executive who chaired the commission, complains that they have been watered down.
Banks are tottering and industrial bankruptcies are rife. Fear is growing that Germany will go the way of Japan, which has suffered 10 years of stagnation. To cap it all, Germany suffered the indignity this week of a formal reprimand from the European Commission for running a budget deficit of 3.8 per cent of GDP, exceeding the 3 per cent limit under rules that Germany itself created to underpin the euro.
In these circumstances, a degree of schadenfreude might be expected in other capitals. For years Germany had been thrust down their throats as the model of economic virtue. The mighty Deutschmark ruled and Bundesbank presidents regularly lectured others on fiscal and monetary probity.
The situation is too serious, however, for others to take much pleasure. With Japan's recovery faltering, and German weakness holding back the European economy, the US looks like being left again as the world's main source of growth - and there are doubts about the sustainability of its performance.
Most EU neighbours have big trading relationships with Germany, and suffer when German growth falters. Pedro Solbes, EU monetary affairs commissioner, has cut his eurozone growth forecast to 0.8 per cent this year and 1.8 per cent next - down on the 2.9 per cent for 2003 predicted in the spring.
Economic problems do not automatically translate into lack of clout in international affairs. Despite its difficulties, Germany remains a large, rich player that can assert itself if it chooses. Its EU partners are as interested in how it interprets that role as they are in its economic plight.
The rift between Berlin and Washington during the election campaign, when Mr Schröder condemned US "adventures" in Iraq, worried Germany's neighbours not only because it widened Europe's splits. It also aroused a deeper anxiety: that Germany would start to act unilaterally.
For the past 50 years, German leaders have sublimated national instincts to the broader EU good - not least in exchanging the D-Mark for the euro, which was far from popular with many Germans. But in rejecting any attack on Iraq, even if authorised by the United Nations, Mr Schröder was simply reflecting the views of four-fifths of Germans. Berlin's neighbours fretted about where such a precedent might lead, if translated to other issues.
Mr Schröder has responded in two ways. First, he has tried to assuage President George W. Bush by taking on leadership of the Afghanistan peace-keeping force, and making clear he would not impede US use of German bases in an Iraq campaign.
Second, Germany has re-engaged in EU politics. Joschka Fischer, foreign minister, has taken Germany's seat in Valéry Giscard d'Estaing's convention on Europe's future, and Mr Schröder has put aside personal differences with France's President Jacques Chirac to resurrect the Franco-German alliance.
The price is some startling policy switches: Germany dropped its demand for sweeping farm reform and accepted a deal that largely preserves the Common Agricultural Policy until 2013. Now France and Germany are trying to reach a common view of the EU's constitutional future, on which they have hitherto been divided: France in favour of bolstering the nation states, Germany of strengthening community institutions. All this has boosted France's influence, but at the price of unpredictability. The factor uniting Germany's domestic and foreign policy is Mr Schröder's pragmatism, which critics deride as inconsistency. His zigzags in European policy are of a piece with his wavering commitment to economic reform.
The government insists that labour market reform is its top priority. It also promises to curb the cost of healthcare by cutting drug prices and freezing payments to doctors, and to make a start on tackling deep-rooted educational problems by extending hours in schools. It has bowed to pressure from the Greens by setting up a commission on welfare state reform, whose chairman talked this week of radical changes to the overstretched state pension system. Critics doubt, though, how far Mr Schröder is prepared to go. Economists have long warned that Germany must tackle the inflexibilities of its highly regulated labour market, making it easier to fire workers, curbing generous unemployment benefits, decentralising rigid national wage bargains and reducing high payroll taxes.
Wolfgang Clement, the new economics and labour "superminister", appears unimpressed. The deep reforms demanded, "even if one wanted them, could not be implemented against opposition of important groups in society", he said this week.
Germany is in a bind. It cannot escape by devaluing its currency now it is in the euro, which many believe it entered at too high a rate. And externally the euro is more likely to rise against the dollar and yen than to fall.
Interest rates set by the European Central Bank are too high for Germany. The stability pact and Germany's own structural deficit (irrespective of the economic cycle) cramp its room for fiscal expansion. It is in a vicious circle in which low employment leads to higher welfare claims and eventually heftier payroll taxes, creating still more unemployment.
Structural reform is the only long-term answer, but in the short term it would cause pain that neither government nor the public appears willing to contemplate. Germany remains a wealthy, comfortable society. The danger is that, like Japan, it would prefer to muddle through than take tough policy decisions.
The price will be paid right across Europe. The EU has little chance of achieving its aim to be the world's most dynamic economy by 2010 if its biggest member drags its feet on reform. A strong Germany may be seen as creating problems: with a weak one, they are guaranteed. |
