BUSINESS/ECONOMY

A spreading German gloom

PATRICIA CHISOLM June 6 1988
BUSINESS/ECONOMY

A spreading German gloom

PATRICIA CHISOLM June 6 1988

A spreading German gloom

BUSINESS/ECONOMY

The Second World War left Germany with little more than flattened factories, burned fields and millions of hungry and homeless

people. But with massive infusions of Western aid under the Americansponsored Marshall Plan, the newly created Federal Republic of Germany rebuilt itself with inventiveness and energy. Its success was astonishing. By the mid-1960s exports of steel, coal, machinery and high-quality consumer goods were fuelling a surging recovery that had outpaced all of its European neighbors. But cracks are now showing in West Germany’s economic machine. Mammoth subsidies that prop up inefficient indus-

tries are a major drain on the treasury, and taxes and labor costs are among the highest in Europe. DeAnne Julius, director of economics at the Royal Institute of International Affairs in London, said that the result has been the “transformation of Germany from the economic locomotive of Europe to its dragging anchor.”

With a gross national product (GNP) of $1,393 billion last year, Germany’s huge economy remains the largest in

Europe and the third-largest in the Western world, after the United States and Japan. It is also the world’s largest single exporter, ahead of those same two countries. But there are persistent signs that Germany’s pre-eminence could end within the next decade if its cautious, fiscally conservative government does not take steps to revitalize the heavily regulated economy. In fact, many analysts say that in almost every area—agriculture, heavy industry, finance, telecommunications and transportation —German industry is due for extensive modernization.

The enormous size of the German economy means that many other world markets rise and fall with it. United States Treasury Secretary James Baker has repeatedly demanded that West German Chancellor Helmut Kohl expand the economy, creating increased demand for American imports. But Kohl has steadfastly resisted the pressure, citing the inflationary effect of stimulative measures and insisting that Germany will take no chances with the stability of its currency.

But signs of economic malaise are everywhere. Growth last year among the other leading industrial nations— the United States, Japan, Britain, France, Italy and Canada—averaged

3.3 per cent, but Germany’s GNP grew at a miserly 1.7 per cent. In fact, growth in Germany has averaged only 1.5 per cent since 1980, while once-stumbling Britain has posted yearly GNP gains of up to four per cent since 1982. Said Daniel Schwanen, international economist at the Canadian Imperial Bank of Commerce: “We could see a change in the balance among European countries by 2000 if Germany continues to stagnate and

other countries continue to grow.” Unemployment, already uncomfortably high at 9.7 per cent, is expected to rise slightly this year. Particularly hard-hit are the steel and coal industries in the Ruhr Valley. Once a vigorous industrial heartland, the Ruhr is now a rust belt as grim as any in the world. Nearly 20,000 jobs have been lost in the town of Duisburg in the past two years, pushing unemployment there to 16 per cent. At the same time, German labor costs have skyrocketed. With generous benefits, including sixweek annual holidays, one employee costs a typical German company about 80 per cent more than a similar employee in poorer industrialized countries such as Great Britain.

As slower economic growth cuts into tax revenues, the cost of supporting those who are out of work has escalated—and that is pushing Germany deeper into debt. But Germans are proud of the safety net that their extensive social welfare system provides, and most are firmly opposed to any cutbacks in social services. There are still many who remember losing everything twice in a single lifetime—after each world war. But the costs are high. On average, 16 per cent of an employee’s salary goes to support the public health care system.

Even the industrial sector has grown accustomed to guaranteed support. Subsidies totalling $32.7 billion are keeping agriculture, steel, coal and shipbuilding alive, but none of those industries is expected to recover from the current steep decline in the near future. Said Schwanen: “In the end, it is a waste because they are not channelling resources where the demand is. It’s an investment in the past, not the future.” And the price is already being paid. This year’s projected deficit of $35 billion is higher—as a percentage of GNP—than even the bulging American budget deficit.

Finance Minister Gerhard Stoltenberg has made an attempt to stimulate the economy by using tax cuts to bolster consumer demand, but he has managed to do little more than gain a reputation for stinginess. Under a major tax reform announced in 1986, Bonn pledged to cut taxes until a total of $41 billion would be lopped off tax bills by 1990. Last fall, however, he announced that at least a third of the cuts would be clawed back through more taxation on consumer goods, the réintroduction of a withholding tax and the abolition of other tax breaks. In addition, the top rate of corporate tax will be cut by only three per cent, to 53 per cent. That compares unfavorably with Great Britain’s top rate of only 35 per cent. The net result will be that the German economy stands to gain little, if anything, from the tax package. Said a leading economist with the renowned Kiel Institute:

“As it turns out, the scope of tax reform will not be sufficient to breathe more dynamism into the flagging economy.” One bright spot is the reassuring surge in exports that began late last year and has continued this year. But Germany’s heavy dependence on exports makes it particularly vulnerable to currency fluctuations. The nearly 50-percent decline of the American dollar against the deutsche mark over the past two years helped take a slice off of Germany’s trade surplus, which dropped to $57.9 billion in 1987 from $60 billion in 1986. But the growing health of Germany’s European neighbors—where 80 per cent of German exports are sold—has helped offset the loss. And most currencies in the European Common Market trade in a narrow range close to the mark, effectively protecting German exports to Europe from currency swings.

Still, the German economy is expected to remain stagnant until major reforms are initiated to make its industries more competitive with countries following more forward-looking policies. Not even the lowering of all trade barriers in Europe, set for 1992, will galvanize the German economy if its industries remain expensive relative to those of its trading partners. And it is unclear whether the political will to change exists. West Germans can still point to one of the highest standards of living in the world. Extremely low inflation makes wage increases real gains. And the traditional German admiration for thrift and fiscal caution reinforces the government’s reluctance to take risks. Ultimately, West Germany has little choice but to undertake sweeping reforms to recapture the glow of its postwar economic success. But the adjustment could be painfully slow. Now, there is a great deal to lose, and the West Germans, rich and set in their ways, have a great deal to be concerned about.

PATRICIA CHISOLM

with

PETER LEWIS

in Brussels and correspondents’ reports