20 Oct 2014

Germany irks neighbours, choosing balanced books over growth

Eberswalde was once famous for its heavy industry. Now, the river bank of this small East German town, is dotted with deserted factories.  Now one of the town’s biggest employers, the state owned railway Deutsche Bahn, is closing a freight maintenance yard, with the loss of 500 jobs.

The decline started with reunification – many of these industries were always going to struggle in a market economy. But now the town is being hit by a thoroughly modern downturn: Germany’s economy shrank between April and June this year and the latest projections say it has flatlined over the summer too.

The cause? Falling exports and a government that would rather see balanced books than economic growth.

By law the German government has to aim for what they call the “schwarze null” – the black zero, indicating tax receipts and public spending balance out. It’s a nice thing to have, if your economy is dynamic, but Germany finds itself beset by domestic problems and demands from its neighbours.

For Europe to rebalance, as the bankrupt and inefficient south goes through austerity, Germany should logically expand demand. Yet its balanced budget law, and the hostility of its electorate to public debt, mean it can’t.

For Uwe Wittemberg, who worked for 32 years at a paper mill in Eberswalde, it means times are tough: he hasn’t worked since the mill closed two years ago.

“In Eberswalde, the big companies that pay decent wages are going bust, or moving their production abroad for example to Poland as with Deutsche Bahn railyard,” he tells me. “As wages fall, spending buying power is falling in the town. The new, smaller companies don’t pay higher wages.”

Places like this were seen as the exception in modern Germany; hangovers from the days of the GDR, their problems would be put right by the relentless growth stimulated by the country’s great industrial export machine.

But that has faltered: as China slows down, as Russia imposes sanctions, and as the rest of Europe suffers low or zero growth you can’t rely on exports alone.

Marcus Fratzscher, who runs the economic research unit DIW in Berlin, thinks the whole economic model is broken.

“Germany has seen a big slowdown in economic growth,” he says. “The first reason is slowing exports – the second is low investment. Germany has one of the lowest investment rates of all industrialised countries; the public infrastructure is crumbling.

“And while German companies do invest, they’re creating more jobs abroad: 37,000 jobs were created by the top 30 companies abroad last year, compared to only 6,000 in Germany.”

As a result, says Professer Fratzscher, the lowest paid 60 per cent of the workforce has actually seen their wages decrease over the last 15 years.

But it’s not only with the domestic economy that the German government is resisting stimulus.

At the European level, the ECB wants to loosen both monetary policy, by printing up to 900bn euros, and fiscal policy, by relaxing the borrowing targets for countries like Italy and France.

Germany is saying a firm no to any let-up on austerity elsewhere, and is not certain to green light the ECB’s money printing operation either.

One reason why is pressure from the electorate. Klaus-Peter Willsch, a member of the ruling CDU party, who represents the Rheingau in western Germany, tells me:

“It’s quite clear the European Central Bank cannot finance the national debt of countries. It’s against the law. Nobody asked them to join the euro, but now they are in they can’t regain competitiveness through devaluing their currency. They have to accept lower wages, and yes we call that deflation.”

Without exports, the German economy has to rely on consumer spending and investment. But this is a country where net investment has declined for twelve years in a row: you can see it, especially in the east, in the shabby infrastructure.

As for consumer spending, this is this is the homeland of the cut-price chains Aldi and Lidl: Germans save more than the average European and spend less, especially on credit. While consumer spending has been growing in recent years, it’s not yet enough to drive the economy if exports stop growing.

This is no sideshow: a large minority of European countries are in deflation. With inflation at just 0.8 per cent in Germany, it’s likely that towns like Eberswalde itself are effectively suffering from deflation too.

Germany sees structural reform in the rest of Europe as the cure for low growth, not stimulus. So what happens – both in the parliament and public opinion – matters profoundly to the whole eurozone.

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