Germany Unlikely To “Spend” Europe Out of Recession

Germany’s trading partners want the country to go on a shopping spree, increase imports and help countries like Greece and Spain grow faster so they can pay off their debts.

But a look at recent history suggests that it might be a bad idea to rely on German consumers for a European recovery.

Consumer spending has been in decline in Germany since well before the crisis hit, and the country has been a quagmire for retailers over the last decade.

Germany’s trading partners want the country to go on a shopping spree, increase imports and help countries like Greece and Spain grow faster so they can pay off their debts.

But a look at recent history suggests that it might be a bad idea to rely on German consumers for a European recovery.

Consumer spending has been in decline in Germany since well before the crisis hit, and the country has been a quagmire for retailers over the last decade.

Gap, Marks & Spencer and even Wal-Mart tried and failed to establish profitable operations in the country.

“The German consumer didn’t join in the spending party when times were good and they are even more reluctant to join in now,”

said Chris Williamson, chief economist at Markit, a data provider that surveys sentiment in the retailing industry.

Retail sales in Germany have been on a downward trend since late 2006, well before anyone worried about Greek bond spreads.

While store sales in April were up a modest 1 percent from March, they were still down 3.1 percent from a year earlier.

Germans tend to be stereotyped as a country of skinflints who always seem to be girding themselves for the next crisis, according to this article from the New York Times.

There may be something to that; the French and British have continued to spend through most of the financial crisis.

Europewide, consumer spending started to decline only last year.

According to European Union figures, in recent years Germany has had the fastest-growing population of residents older than 65, a demographic that is less likely to buy big-ticket items like furniture.

Germans also traditionally save more than their neighbors and export more products than they import.

The United States Treasury secretary, Timothy F. Geithner, and the French finance minister, Christine Lagarde, are among leaders

who have recently urged the German government to take steps to persuade its residents to spend some of their savings on imports and not reach too far in cutting the country’s budget.

“Fiscal consolidation should be ‘growth friendly,’ ” Mr. Geithner said at a Group of 20 conference in Busan, South Korea, this month.

The statement did not prevent Chancellor Angela Merkel of Germany from introducing a plan two days later to cut 85 billion euros ($104 billion) in spending by 2014.

Mr. Geithner’s comments reflect a larger debate about how Europe should respond to its sovereign debt crisis.

While some political leaders and economists fear that austerity programs could undercut growth,

others insist that even countries without dire budget problems should cut outlays.

They argue that Germans and other Europeans will return to the shopping malls only when they believe their Continent is not headed toward fiscal ruin.

“The debt crisis has certainly created insecurity,”

said Rolf Bürkl, who surveys consumer sentiment for the market research company GfK Group.

“There is a fear that political leaders no longer have the situation under control.”

The demographic and economic trends that have brought misery to German retailers are in full view in Hanau, a working-class community east of Frankfurt.

On a warm day recently, an elderly man slowly pushed a walker past the windows of what used to be a Karstadt department store that filled half a block in Hanau’s pedestrian zone.

Karstadt, once the largest department store chain in Germany, has been closing its least profitable outlets as it tries to emerge from bankruptcy.

Denuded of logos and swept clean inside, the only color on the store’s gray facade was a poster advertising a concert by Unk, a rapper from the United States.

Next door, a store called Billig Kaufhaus, or Cheap Department Store, had taken over space once occupied by a sporting goods chain.

Billig Kaufhaus offered an eclectic selection of goods, from luggage and World Cup souvenirs to decorative wooden statues of cats.

Nearby stores did not exactly fit with the upscale image that Karstadt had tried to portray.

They included a secondhand clothing store and a manicure salon with a sideline in sexy lingerie.

“There’s nothing happening. People don’t know where to go,” said one passerby, Margrit Jügel of Hanau.

Lowering her voice as if confiding a secret, Ms. Jügel mentioned another German department store chain still operating a few blocks away.

“I hear they’re not doing so well either,” she said.

Even if German leaders were inclined to try to stimulate spending, it is questionable whether tax cuts or other government encouragement would do much for shops in places like Hanau, economists say.

German wages have been stagnant for years, and the aging population is focused on saving for retirement.

In fact, a tax cut could even backfire by heightening fears that the government will not have enough money to pay pensions.

“They say, ‘What’s going to happen when I’m 90? I have to start saving now,’ ”

said Francesco Giavazzi, a professor of economics at Bocconi University in Milan who has studied the German response to pension overhauls.

That argument is endorsed by central bankers, who say austerity measures will raise confidence by reassuring Europeans that government finances are sound.

“The view that fiscal consolidation is generally negative for growth is too narrow,”

Jean-Claude Trichet, president of the European Central Bank, said Thursday in Vienna.

Germany also takes heat for its trade surplus, which is by far the largest in Europe.

But no one has yet come up with a formula to bring its imports more closely in line with exports.

“You can’t reduce the surplus by reducing exports, that would be nonsense,”

said Christian Dreger, an economist at the German Institute for Economic Research in Berlin.

He said Germany should increase demand by making it easier to start businesses and by reducing barriers to competition,

like standardized fees for tax advisers and other professionals.

The German government already tried direct stimulus last year, cutting payroll deductions and raising the allowance parents receive for each child.

“That is already a clear impulse. That raises disposable income,” said Simon Junker, an economist at Commerzbank in Frankfurt.

“But the Germans save the money and that cancels out the effect.”

A cash-for-clunkers program helped German auto sales surge last year.

But new registrations plunged 25.5 percent in the first four months of 2010 after the incentives expired.

“It’s a question of creating the conditions for growth,” Mr. Dreger said. “Consumer giveaways or scrappage schemes are a flash in the pan.”

The most important factor in consumer confidence is people’s assessment of future employment prospects, said Mr. Bürkl, the market researcher.

GfK calculates that for every person who loses a job, three friends or family members become more cautious about spending out of fear they will be next.

German joblessness has risen during the financial crisis, but less than in the United States

because of programs that let companies cut working hours, with the government reimbursing part of the lost income.

The government may be on the right track with such programs, Mr. Bürkl suggested.

“Ultimately the best thing for consumption would be better prospects for jobs, because it raises income and also expectations,” he said.

For Mr. Williamson, the economist at Markit, “It’s a case of persuading the population that we’re over the worst.”

Which, of course, we at EW think is close to an outright lie, especially given the extent to which both the US in Black September 2008,

and now Europe during the sovereign-debt crisis, have followed just about every major step of the disastrous Japanese approach,

which has created TWO “Lost Decades” since their real estate market imploded in 1989.