The “New” Germany A Complex Mix of Factors

 

31 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

One of the most striking developments of the Eurozone crisis has been the emergence of what might be called a “tough” Germany.

As readers of this site know, the Germans were among the most militant in opposing the “rescue” of Greece from a potential default, which –

 

31 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

One of the most striking developments of the Eurozone crisis has been the emergence of what might be called a “tough” Germany.

As readers of this site know, the Germans were among the most militant in opposing the “rescue” of Greece from a potential default, which –

as pointed out by former Bundesbank President Karl Otto Pöhl in our piece on him –

was in fact a bailout for the German and, especially, French banks that had loaned the Greek government money over the years,

which made the intense German animosity to it a little strange, but nevertheless at least partially understandable.

This was followed by a period of rising tensions throughout the Eurozone, basically between Germany and everyone else in the group,

most of whom were shocked by the tough talk, though less militant action, of Chancellor Angela Merkl.

Then, the second quarter economic growth figures came out in July,

and Germany blew away everyone – including itself – with a 2.2% total,

the highest quarterly number for the country since Germany was unified 20 years ago in 1990.

Once this happened, of course, the “balance of power” within the Eurozone shifted in Germany’s favor,

since it SEEMS to have been “right” in taking such a tough line with Greece, given its own apparent success,

while nearly everyone else in the EZone is evidently floundering.

France’s economy grew at just a small fraction of Germany’s, 0.6 percent in the second quarter.

Spain’s economy grew an anemic 0.2 percent, while Greece’s shrank 1.5 percent.

It’s therefore a complex issue, and, in order to make it understandable,

we’ll break it down into two different sections, each one of which is significant and substantive.

Today, we will talk about some of the INTERNAL dynamics that have led to the rise of this “new” Germany;

next week, we’ll talk in detail and at length about single most important EXTERNAL factor in current German economic “miracle,”

which we can at least mention now, namely, its

huge success in selling high-tech capital goods to China –

a fact that has some Germans nervous, not just because so much appears to depend on a single export market,

but also because of the signs of SOME kind of slowdown in China,

whose exact nature and dimensions, of course, remain as yet unclear.

As always, the internal aspects are a mixture of political and economic factors.

The chief political factor is that – for the first time in post-World War II history,

there is a German chancellor who is NOT from the old West Germany.

This is crucial, because the West Germans – not always willingly, especially at first, but, in the end, strongly / decisively / irreversibly –

took responsibility for, as the saying went when I was there in the early 90s,

“what our fathers did,” namely, the horrific crimes of the Third Reich.

The basic approach was to create West Germany as a “European Germany,”

whose most fundamental orientation was the strengthening of a united / democratic/ market-oriented Western Europe,

able to stand firm against the perceived threat from the Soviet Union to the East.

As a result, both West Germans and Europeans became used to a Germany

that would willingly sacrifice its so-called “national” interests and sovereignty for the greater cause of European unity.

And the results were positive for ALL concerned, both Germans and the rest of Western Europe.

The attitude towards the Third Reich was quite different, however, in the East Germany in which Frau Merkl was raised.

There, the basic line was that the Communists were as much victims of Nazism as the Jews / gypsies / gays / Eastern Europeans,

so there was no need for any significant introspection about and / or sacrifice regarding the Third Reich from East Germany,

especially since it was the front line of the Soviet-dominated Eastern bloc.

Consequently, most East Germans have never gone through the serious soul-searching as a society about the Nazi period

that was a major pre-occupation of West Germany all throughout the 50s / 60s / 70s / and 80s.

For Merkl, then, and most of the rest of the former East Germans,

there is no particular need for Germany to “sacrifice” its perceived “national” interests in favor of European unity –

an attitude shocking not only to most other Europeans, who had become used to a restrained and self-denying Germany,

but many former West Germans as well, who had become committed during those years

to the notion of being Europeans first, German second.

In this sense, many Germans and Europeans found Merkl colossally “tone deaf” to the European aspect of the Greek default situation,

and were critical of the nakedly “national” definition she put forward of German interests in the matter.

But there were also those in Germany who supported her stance, and for a variety of economic reasons.

Put bluntly, many West Germans resent the economic sacrifices

they have made for their Eastern brothers and the sake of a united Germany.

And they HAVE seen a definite decrease in their standard of living since the unification –

one that has not been easy or pleasant to bear.

In this context, when the Greek situation suddenly exploded,

the initial reaction of many German taxpayers, especially from the former West, was along the lines of

“What ??? Now we have to pay AGAIN for the inadequacies of our supposed ‘fellows’ ???

Thanks, but no thanks – we’re tired of paying for other people” –

which, of course, was precisely the attitude the former East German Merkl assumed almost instinctively.

In this sense, from the Western German perspective – and, in a different way, the Eastern point of view as well –  

there was a real logic behind the resistance to “helping out” their Greek “brothers”,

even though, as we’ve pointed out, the REAL beneficiaries of any bailout were hardly Greek public sector workers and taxpayers –

who face massive layoffs and a grinding austerity program for the foreseeable future –

but, as former Bundesbank President Pöhl pointed out,

the German and French BANKS who had loaned the Greeks all that money.

Despite this, the venomous contempt in the German news media directed at Greece

raised significant concerns among allies that a more assertive Germany had emerged,

said Thomas Klau, an expert on European integration at the European Council on Foreign Relations.

“That was like a wake-up call to the rest of Europe that something had changed in Germany,” Mr. Klau said.

In addition to these intensely complicated political factors,

there are, of course, powerful economic dynamics at play here as well,

perhaps most importantly the so called “short-work” or kurzarbeit policy,

whose beneficial effects we will examine shortly.

As noted, the strong growth figures for the second quarter reinforce the widespread conviction among policy makers

that they handled the financial crisis and painful recession that followed far better than the United States,

which, they never hesitate to – correctly – remind, brought the world into this crisis.

But the roots of Germany’s export-driven success reach back to the painful restructuring

under the previous government of Chancellor Gerhard Schröder.

By paring unemployment benefits, easing rules for hiring and firing,

and management and labor’s working together to keep a lid on wages,

Germany ensured that it could again export its way to growth with competitive, nimble companies

producing the cars and machine tools the world’s economies — emerging and developed alike — demanded.

As the latest numbers show, Germany is outproducing its neighbors by wider and wider margins,

raising fears of a two-speed Europe that could render the common regional currency unstable,

a scenario we pointed to when this crisis erupted in February.

If policy makers in Berlin are right and the turning point has been reached, they will look wise.

But if the fragile recovery cracks, as the US continues to slow,

and a cooling down of Chinese growth may augur, as we will examine in detail next week,

Germany could bear the brunt of the blame for doing too little to foster regional and global growth.

That said, government officials here are confident they found the right approach,

including a better solution to unemployment.

In this context, a vast expansion of a program paying to keep workers employed,

rather than dealing with them once they lost their jobs,

was the most direct step taken in the heat of the crisis.

They extended the “Kurzarbeit” or “short work” program

to encourage companies to furlough workers or give them fewer hours instead of firing them,

making up lost wages out of a fund filled in good times through payroll deductions and company contributions.

At its peak in May 2009, roughly 1.5 million workers were enrolled in the program.

The Organization for Economic Cooperation and Development recently estimated that

by the third quarter of 2009, more than 200,000 jobs may have been saved as a result.

The role of this program is visible in smaller towns like Memmingen, in the historic region known as Swabia.

After a record year in 2008, the family-owned firm Magnet-Schultz watched orders for its electromagnetic products plunge.

Nearly one-third of the company’s more than 1,500 workers in Germany were put on the short-work program.

Only 57 were laid off.

The firm’s chairman, Wolfgang E. Schultz, whose grandfather founded the firm nearly 100 years ago

and whose son Albert joined as a vice president in January, said that

his goal was to maintain the company in the long term by losing as few skilled workers as possible.

He promised to try to rehire those who were let go when times improved.

Forty of those 57 workers have been rehired already.

German exports rose in June by 28.5 percent compared with the year before,

the highest level since the financial crisis began to pinch in October 2008 following Black September.

The renewed boom for industrial companies like Magnet-Schultz has

helped push the unemployment rate down to 3.4 percent in Memmingen,

less than half the national average of 7.6 percent.

“The government took the right steps in extending the short-work program because it bridged a difficult situation,”

Mr. Schultz said in an interview with the New York Times.

As we have noted, the German “miracle” is by no means assured,

especially given the dependence on China, which we will examine next week.

But any success it might have is due not so much to the austerity programs it is demanding of its southern neighbors,

but, rather the sense of social solidarity and common fate embodied in the kurzarbeit program –

keeping people working, even if less than they or their employers want –

in order to maintain a cohesive working community, able to take advantage of new economic opportunities quickly,

if and when they do come along.

If there is anything the rest of Europe and the US should take away from Germany’s current “success”,

it shouldn’t be austerity programs that generally don’t work, as we have seen clearly with reference to Ireland,

but rather the economic integrity and human treatment of workers contained in the kurzarbeit program.

Maybe that’s what Rahm Emanuel and others SHOULD mean by “never let a crisis go to waste” –

because what the Obama administration is/n’t doing now is nothing BUT a waste.

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com