Yeah. In Bizarro World theory.
Posted on 04/30/2005 12:57:39 PM PDT by Jibaholic
In a new report, six think-tanks have slashed their forecast for German economic growth in 2005, citing high oil prices and an unfavourable exchange rate. If Germany’s export-driven economy cannot recover when the world economy is racing along, how will it fare during a slowdown?
IN THEORY, Germany should be booming by now. Sizzling global economic growth in 2004, and more of the same expected for 2005, has raised demand for its exports, a boon to its large manufacturing sector. The European Central Bank (ECB) has kept interest rates in the euro area at an easy 2% for 22 months, and looks set to keep doing so well into 2005. Fiscal policy is also expansionary: the government’s budget deficit has breached the Maastricht treaty’s 3%-of-GDP limit for three years running, and by all accounts will do so again this year. Yet for all this, for the past four years Germany has struggled to produce GDP growth of even 1% a year.
The future looks little better than the past. This week a consortium of German think-tanks released its semi-annual report, slashing its forecast for German growth this year from a lacklustre 1.5% to an almost pulseless 0.7%. The German government then altered its own forecast to 1.0%, down from its previous one of 1.6%, made in January. More worryingly, the think-tanks' report argues that the German economy is not stuck in a particularly vicious cyclical slowdown. Rather, its structural problems, particularly the highly regulated labour market, have reduced trend growth (the average growth rate of the economy) to a meagre 1.1%, in contrast to roughly 2% for the rest of the euro area, and about 3% for the United States. Unless these trends reverse, Europe’s largest economy could eventually wind up as its economic backwater.
Six German economic think-tanks have cut their forecast for growth this year: the Institute for Economic Research at the University of Munich (IFO); Kiel's Institute for World Economics; Halle Institute for Economic Research; the RWI Essen; the Hamburg Institute of International Economics (HWWA); and the German Institute for Economic Research (DIW). The International Monetary Fund publishes its World Economic Outlook. See also the European Central Bank. Political Resources on the Net has links to Germany's main political parties.
The most stagnant pool is undoubtedly the labour market. Germany’s unemployment rate fell to 11.8% in April from the record 12% it hit in March, pushing the number of jobless back below 5m for the first time in months. However, this may have more to do with changes in benefits for the unemployed, and a cold spell in March that made that month's figures unusually low, than any improvement in hiring conditions. On Tuesday April 26th Bert Rürup, head of Chancellor Gerhard Schröder’s panel of economic advisers, said that the country will not begin adding significant numbers of jobs until annual economic growth hits 1.5-2%. High unemployment has helped keep consumer spending depressed, leaving the economy dependent on exports to drive recovery. But global economic growth, which the International Monetary Fund’s World Economic Outlook puts at 5.1% in 2004, is forecast to slow a bit, to 4.3%, in 2005. If 5.1% wasn’t enough to pull Germany out of its doldrums, what will?
To be fair, Germany knows that it has a problem. Mr Rürup acknowledged on Tuesday that the economy could add jobs at lower growth rates if its labour market was more flexible. Since 2003, the government has made serious efforts at structural reform, loosening some of the labour-market restrictions that have made Germany such an unattractive place to create new jobs, and announcing a cut in corporate income tax. Critics, however, complain that the latter will make little difference to most companies, while the former does not go nearly far enough. Germany’s labour laws are still much friendlier towards workers than employers, and its labour costs, at the equivalent of around $33 per hour, are among the highest in the world. And fears that poorer new European Union members will force Germany into a “race to the bottom” have driven the government to consider imposing a minimum wage, which can only make the economy less flexible.
The rock meets the hard place
The trouble for the government is that it has to try to kickstart the economy while struggling to hold on to power. In February, Mr Schröder’s Social Democrats (SPD) were pushed into second place by the opposition CDU in a state election in Schleswig-Holstein; exit polls suggested that high unemployment and the budget deficit were decisive issues. Now all eyes are on the election to be held on May 22nd in North-Rhine Westphalia, Germany’s most populous state. A loss there could doom the government’s chances of winning the 2006 general election.
Fear of the impending election seems to be pushing the SPD further to the left, at least rhetorically. Besides the flirtation with a minimum wage, the party’s chairman, Franz Müntefering, began railing this month against the “growing power of capital”. According to Mr Müntefering, profit-seeking by international firms not only endangers Germany’s generous welfare state, but also its democracy. Such statements may reassure voters, but they are unlikely to make Germany a more appealing place to do business, particularly with investor-friendly central European countries beckoning firms to relocate.
From the point of view of a German politician, alas, all policy choices must look bad. Membership in the euro area leaves the country monetarily at the mercy of the ECB, which seems determined to maintain a hard line on inflation, and thus to resist calls for an interest-rate cut. Germany’s already-large budget deficits cannot be sustained indefinitely at such low rates of economic growth, much less increased. And deeper structural reforms will not be popular with the voters who lose benefits or job protection—particularly since such reforms may well make unemployment worse in the short term, as firms shed the workers they previously found it difficult to fire.
Yet from an economist’s point of view, doing nothing looks worse. This week’s think-tank report forecasts growth to pick up next year, but only to 1.5%, hardly cause for celebration. Moreover, the forecast assumes that the impact of high oil prices and an appreciating euro will fade, even though there is a real possibility that one or both will rise instead of fall. There is also a risk that America’s unsustainable current-account deficit, which has been supporting world growth, will precipitate a crisis, which would hurt demand for Germany’s exports. With the economy this vulnerable to external effects, even radical reform may be less risky than the status quo.
When will the liberals learn that government intervention (AKA socialism) doesn't work?
Yeah. In Bizarro World theory.
Yes, I'm sure it's the "exchange rate" and "high oil prices" that are causing it.
Ah yepper.
Regards
Logically, they are socialist and deeply committed to it. As a result they should be flourishing as a result of their superior economic model. Please spread the word.
The good thing about unemployment in Germany is that when a German worker loses his job he has to find something else to occupy only 18 hours a week.
As long as there is a higher priority on redistribution rather than growth, an economy will flounder. The US has socialism, but we don't like to call it that. However, we don't have too much of it to offset growth. All Europe needs to is implement pro-growth policies and things will take care of themselves. Ireland is the best example of success in action.
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