The Reckoning

Flashback 1992: Kohl fudges the books

The following article is reproduced with the author’s permission from the now-defunct political journal, The New Leader. Sadly, its archive is available only for an exhorbitant yearly fee.

Germany without miracles: in deep recession. (Cover Story)

The New Leader

February 8, 1993 | By Michael Moran 


The three-pointed Mercedes star still shines brightly above Stuttgart, but beneath that luminous symbol of German economic prowess all is not well these days. For the first time in its history Mercedes’ parent company, Daimler-Benz, ordered production shut down for an extra week at the turn of the year and imposed a month of short-shifts on assembly lines. An unprecedented $500 million to $600 million loss is expected in 1993. Mercedes says it will cut 20,000 of its 238,000 employees worldwide by 1995, with most of those cuts coming in Germany. Plans for a truck assembly plant in eastern Germany, announced with patriotic fanfare just a year ago, have been indefinitely postponed.

Across the river at Porsche, the situation is much the same. The sports car maker has laid off over a quarter of its workforce. In Wolfsburg, Europe’s largest automaker, Volkswagen, has said it will trim 30,000 jobs - again, mostly in Germany - by 1995. Other manufacturers are also hurting. Chemical giant BASF will eliminate 10,500 jobs before the end of December, partly by moving its main fertilizer plant to Antwerp. Munich-based Siemens, this country’s biggest computer and electronics firm, has let 4,500 workers go and stopped hiring apprentices. The list of layoffs goes on, reading like a roster of national industrial giants.

Following almost a decade of steady expansion, a recession even in mighty Germany was perhaps inevitable. The Gross National Product (GNP) grew an anemic 0.6 per cent in 1992, after averaging 2.3 per cent annually since 1981. Optimists are forecasting zero growth this year. Government officials, who face an election in ‘94, are putting the best possible spin on the downturn now that it has been openly acknowledged. Finance Minister Theo Waigel assessed 1993’s economic prospects this way: “In the industrial sector we will have rising unemployment…. The weakness that other industrial countries had two and three years ago has caught up with us. That was postponed in Germany by unification and the resulting boom in demand.”

Business leaders and some analysts see far more serious forces at work than can be explained by reunification and the business cycle. Indeed, there is an increasing body of evidence that Germany is entering a period of profound restructuring, not unlike the one precipitated by the 1973 and ‘82 recessions in the United States. Those historic slumps, with their skyrocketing interest rates and inflation, halted the growth of American working-class living standards and heralded the rise of the service economy. Despite some variations, the scenario is replaying itself in the last nation in Europe where manufacturing and engineering still reign supreme. Throughout the country, corporations burdened by the enormous costs of doing business in the world’s most expensive labor market are moving their operations abroad. This trend threatens long-term domestic growth potential and poses serious questions about the current Western strategy toward the emerging economies of Eastern Europe and the former Soviet Union, which has assumed that the ever-rising tide of German business will lift all boats.

Significantly, the Bundesbank has never believed the optimistic picture painted by Bonn after the fall of the Berlin Wall. The German central bank - actually a committee of eight men - is not a beloved institution, at home or abroad. Its policy of high interest rates has been vilified as a drag on the economy and as the chief reason for the collapse of the European Rate Mechanism, designed to keep European Community (EC) currencies in alignment. Yet some insist that it has been the lonely voice of reason in Germany since reunification in 1990. Unfortunately, it does not often make its news crystal clear, preferring instead to let interest rate decisions do the talking.

Recently, however, during a rare public appearance at the University of Toronto, Bundesbank Vice President Hans Tietmayer explained his opposition to the easy credit policies favored by Chancellor Helmut Kohl and foreign leaders. He described Germany’s economy as undergoing “a critical transition.” The country is suffering from “a dangerous and unnecessary price-wage spiral,” he said, and most of the huge transfers to the moribund eastern sector are being wasted. If this continues, Tietmayer cautioned, Germany’s long-term ability to sustain economic growth could be badly damaged.

The recession that began in mid-1992 would be bad enough for coming amid the pressures of reunification, but there are other factors making it especially troublesome. It is the first one since World War II to hit Germany at a time of rising public sector deficits, high unemployment, racial violence, and demands from capitals for greater participation by Bonn in international affairs.

On a structural level, the migration of heavy industry abroad is confirming that many of Germany’s postwar “miracles” are fading away. After experiencing the virtually total destruction of its economy by Allied bombers and Russian artillery, West Germany fashioned a recovery that gave it one of the two most modern industrial bases in the world (the other, of course, being Japan’s). For decades this competitive edge, coupled with the single-minded dedication of the generation that rebuilt the country, enabled it to shrug off recessions and Cold War crises while still expanding social programs and raising wages to keep labor happy.

Today the factories built in the late 1950s by, say, automaker BMW or chemicals conglomerate Degussa are being phased out. As labor costs rise and plants age, businesses are opting to move overseas. BMW has just opened its first foreign assembly plant in South Carolina. Degussa, for the first time in company history, is investing more in its U.S., Taiwan and Brazilian plants than in its aging Frankfurt flagship.

The government estimates that Germany is exporting nearly 100,000 jobs a year. Between 1990-92, German companies invested more than $90 billion overseas; in the same period, foreign business investments here amounted to about $10 billion.

At the root of the German loss of manufacturing jobs is the same pox that idled textile mills in England half a century ago and gutted American steel in the 1970s: high labor costs. According to the Cologne-based Institute for the German Economy, industrial workers in the western sector average $24.53 per hour. Their counterparts in the U.S. average $15.45 per hour, in Japan about $15, and in Spain, Portugal and Belgium less than $14 per hour. To make matters worse, German workers receive the most paid holidays on earth (six weeks average), use more sick days (18.3 per year) and have the shortest work week (average 36.5 hours).

The auto industry, directly or indirectly the provider of approximately one-sixth of all employment, is a barometer of economic conditions. The German Automobile Manufacturers Association (VDA) reports that in terms of per-unit production costs the ‘80s saw indigenous companies lose ground to competitors in the U.S., Japan and around the EC. “We are producing too expensively,” says VDA President Erika Emmerich.

Louis Hughes, chief executive of Opel, puts the issue this way: “Manufacturers in Europe need 36 hours to build a car. The Americans need 25 hours, the Japanese only 17 hours.” Factor in labor costs, and it is not hard to imagine the day when all German cars will be produced outside Germany.

Of course, industrialists the world over love to blame unions for their difficulties. In the U. S., where union membership has dropped to 16 per cent of the workforce, the cry rings hollow. But not in Germany, where living standards are high, the social safety net is nearly impregnable, and union membership stands at over 40 per cent.

Last year the unions here ignored calls for restraint as their contribution to rebuilding the East; they demanded, and in most cases won, pay hikes of 6 per cent or more. The worst labor unrest since the War occurred in May, when the 2 million-member Public Employees Union (OeTV) disrupted airports, railways, the post office, and other vital services, forcing the government to grant a 5.4 per cent pay increase - two points above the prevailing inflation rate. In other countries such a confrontation might be understandable, because unions and management are frequently at each others’ throats. Under the German system, unions participate in all corporate decisions from the boardroom down, so the disruption of 40 years of labor peace has been quite unsettling. It should be noted, though, that for ‘93 the OeTV has accepted a 3 per cent settlement.

Peter Seideneck, a liaison officer for the German Union Federation, says unions in this country and elsewhere on the Continent “are having a hard time coming to grips with new realities.” They are caught up in a debate between those who subscribe to the “old, red-flag waving thing,” he adds, and those who see steep wage demands as self-defeating and would rather win assurances that employers won’t simply pick up and move their factories to Spain or Hungary.

Some thought reunification would help break the wage-price spiral that has been sapping German competitiveness. Yet what should have been an asset - namely, 16 million new German-speaking workers - has been turned into a possibly insurmountable liability through a mixture of political miscalculation, economic mismanagement and shortsightedness on the part of government, business and labor.

Thomas Mayer, a senior economist in the London office of Goldman-Sachs, described the squandering of this historic opportunity succinctly. “Unification,” he wrote in a recent column for the Wall Street Journal Europe, “brought a large increase in the labor force and a small addition to the capital stock. The logical consequence of that would have been a decline in the price of labor relative to that of capital. Since the unions were not willing to accept that, they used their powers in 1990 and 1991 … to shield their West German membership from wage declines and push through excessive wage increases in the East.”

In fact, for political reasons Kohl’s coalition acceded to union demands that now oblige industry to pay equal wages East and West. This sounds like a noble gesture from the rich West. In practice, though, it is backfiring badly on workers in both sectors. Businesses are simply investing elsewhere and government - read the taxpayer - is being left with the bill for propping up inherited industrial dinosaurs. Vehicle parts maker Kolbenschmidt ignored the pleas of government officials and shifted production to France and Brazil. Audi reversed a decision to build its new engine plant in eastern Germany and went off to Hungary, where its labor costs are one-tenth of what they would have been. It is impossible to know how many foreign firms retooling plants at present in Czechoslovakia or Poland would have chosen the eastern sector had wages there reflected reality.

In fairness, it must be said that German policy makers are in virgin territory. Until a short while ago, technological advances kept the highly paid German worker competitive. With those edges gone, unemployment in western Germany is above 7 per cent and official figures put eastern joblessness at a little over 14 per cent, although if state-funded “make-work” jobs are taken into account, it is more like 30 per cent.

Perhaps the most dramatic indicator of the changes taking place in Germany is the massive and unprecedented deficit spending that the Kohl government’s policy errors have necessitated. As late as 1989, the country had a budget surplus. Officially, 1992’s deficit is said to be approximately $43 billion, or 3 per cent of GNP, but many believe it is considerably higher.

Dr. Heide-Marie Sherman, a senior economist at the Ifo Economic Research Institute in Munich, sees a danger that the deficit spending, begun in 1990, may become a permanent feature of the economy, depleting the great pool of personal savings that is the foundation of future growth. “There is no historical precedent in West Germany for such deficits,” she said. “Comparisons with the U.S. are inevitable.”

The government plan drawn up in 1990 to help pay for reunification predicted a rise in the annual budget deficit to possibly $55 billion by 1995, the year the Treuhandanstalt privatization agency is due to close up shop and eastern Germany’s five new states are meant to be self-sufficient. Clearly the number crunchers were off the mark. At every turn, it seems, Kohl’s economic team either chose to be incredibly optimistic or simply lied to the public about the costs of absorbing the East.

Those government deficit figures, for instance, conveniently omitted funding for the state-owned railroad, the Bundesbahn, the postal service and the Treuhandanstalt, which is pumping $115 billion a year of borrowed money into the East. The original forecast also assumed an annual GNP growth rate of 2.5 per cent from 1990 to 1995, an achievement now hopelessly out of reach. When the necessary adjustments are made, Germany’s deficit this year actually comes to about $110 billion, or 8 per cent of GNP. That compares with the U.S. deficit of about 5 per cent of GNP.

“The policy mix with regard to unification has been one mistake after another,” said Sherman. “There is definitely a danger of developing a structural deficit. When the Treuhand culminates in 1995, the interest payments on that debt will be substantial and they will pose a significant burden.”

The suggestion that Germany’s powerful economy might be in something other than a “corrective recession” is often greeted here with the kind of sneers that used to be reserved for people who predicted the country would be reunified someday. It is true that Germany, like its former ally Japan, appeared to be an exception to the late 20th century economic rule that heavy industry cannot thrive in a computer-age economy. Yet as the generation that remembers the shame of living among the rubble and rebuilding the country dies off, Germany may not seem so miraculous after all.

Michael Moran, a previous contributor, is a free-lance writer based in Munich and a news editor at Radio Free Europe.