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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4 reader comments

  1. Robert says:

    Actually a lot of the so called ‘shabby infrastructure’ is now in the West. We’ve been paying 7% reunification tax for nearly as long as the Berlin Wall has been down. The infrastructure… bridges, motorways, pot holes and creaking services are in the West in cities in the old industrial heartland of the Ruhr – but across the county and largescale in the densley populated North Rhein Westfalia from Cologne, Dusseldorf, to Essen and the like. Even Berlin is a relatively poor city as little industry or commerce to tax locally. The money has flowed East ad the population has flowed West… “West Germans” are pretty unhappy with their lot.

  2. Marga Beuth says:

    Dear Paul,

    firstly I would like to thank you for covering Germany in your main news – it is such a rare thing on british TV!
    There always seems to be a bit of Schadenfreude in the UK when the German economy is doing badly. I would suggest you balance out your report by adding some important indicators such as GDP per capita – which is 15 % higher in Germany (http://en.wikipedia.org/wiki/List_of_sovereign_states_in_Europe_by_GDP_(nominal)_per_capita) , or productivity which is 30% (see Torygraph of 18 Oct).

    So, whatever is going wrong with the German economy right now it is happening on a much higher and healthier level than in the UK.

    Maybe you could mention those fact before you screen the report by Rees Moog today, just to balance out his highly tendentious comments. Or you could ask Matt Frei to look over any German stories has he has real life experience of the country.

    Thank you,

    Marga
    PS and yes, I am a German national who happens to live in Brighton,

  3. Christa says:

    Marga,

    I am also a German National who has been living in the UK for 17 years. I will never get used to the way the British are obsessed with all things German – they are either full of admiration or the next minute full of spite. Like in a family…

    The most important thing to remember when discussing the current crisis is the fact that individual middle class people in Germany are not very wealthy in real terms. The majority of Spanish or Italians, and also British actually have assets in form of property and live there. Italy, for example is a incredibly rich country, if all these assets are accounted for. In times of rising house prices, these assets are worth a lot, and that is what much of British GDP is based on (and of course them banks). This is traditionally not so in Germany where most people rent, and their savings nowhere near cover the difference. Hence the reluctance of Germans to spend spend spend – the money is truly for a rainy day as the majority can’t just sell a house.
    Wages also have not been rising very much for a long time. Which makes the difference in GDP per capita even more significant and its based on real industrial power.

    That makes it even crazier to lump this kind of economy with the others.

    1. Marga Beuth says:

      Hi Christa,

      thank you, good to hear another perspective!

      Just as a point of fact: any sales of houses are just a transfer of goods and are not counted in the GDP – transfer of assets does not increase the amount of goods available in the economy which is what the GDP measures. Therefore new houses are included, but sales of existing houses are not.

      The main economic effect of the housing market in the UK is inflationary because house prices go up without there being any physical improvement in the house itself.
      xx

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