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29.01.2008
End of a love affairThe latest state elections in the German state of Hesse, which includes Frankfurt, will have important long-term implications for German poltics, and indirectly for international investors. Here are is analysis of the political and the economic implications.
This political constellation will obviously have implications for Germany’s future economic performance. Naturally, the left wants fewer reforms. So the labour market will become less open. One should expect more sectors in which minimum wages will apply. That process has already started under the present Grand Coalition, and will be extended under a government of the Left. Indirect wage costs are likely to rise (which would partly but not totally erode Germany’s competitiveness gains). The health care system would become more regulated, en route towards a state-provided national health service. Energy policy is going to be far more restrictive. Germany’s decision to pull out of nuclear energy will become irreversible (which it is not now), and decommission will be brought forward. One should expect energy taxes to rise, and further increases in VAT are not excluded. One would also expect a more restrictive foreign investment law, and more restrictive corporate governance. The recent proposal by the SPD-run justice ministry to tweak the protectionist Volkswagen law in such a way that it formally concords with a recent Court of Justice ruling that Germany must end the golden share, but in such a way that the state will retain a veto right over anything that happens at the company, shows where this is headed.
I would also expect the state to increase the compensation of state employees, and thus contribute to a rise in nationwide wage. I would expect the wage share of GDP, which has been subject to a falling trend, to rise again.
Foreign investors, who have been pushing the Dax to its dizzy recent hights were totally sold on the German reform story. It has been a bogus story from the start, but it worked. The story was that the previous government conducted tough, unpopular but necessary reforms, which helped bring about the current economic recovery. If you believe this, you believe anything. The Hartz reforms will, over time, contribute to a fall in long-term unemployment, but Germany’s robust recovery is almost entirely due to competitiveness improvements, i.e. wage cuts, and other cost cuts. These were not brought by government action, but by private sector wage negotiators. It cannot be a long-term strategy, if only for the reasons already outlined: The political swing to the left will lead to a rise in wage costs.
Also note: the big political fuss about Nokia’s decision to close a factory and shift it to Romania will be dampen appetite by foreign direct investors. One should only ever invest in Germany, if one certain that one wants to stay forever. This is not market you want to get in and out of, as Nokia is now find out.
What about fiscal policy? This is difficult to say, as there is a cross-party consensus (though not shared by the Communists) that fiscal deficits should be kept down. The Grand Coalition has been good on deficit cutting. A left government will be softer, though possibly not too soft. I would not expect dramatic shifts there. Germany will still be more conservative than France under any political constellations.
Irrespective of whether investors follow real or imaginary stories, it is very hard to figure out a story that would get foreign investors back into the German market. The reform story is slowly withering away, as investors, and newspaper headline writers, are beginning to see what is happening. The competitiveness story is not sustainable by definition (a large mature economy cannot forever prosper by being cheaper than its neigherbours), and in any way the competitiveness advantages will narrow in the future. Energy is going to be a big negative, as is openness, minimum wages etc. So no matter whether investors follow the newspaper headlines, or whether they follow their own analysis, it makes no difference. The Germany story is shifting. This was a good economic recovery. But there has been little structural change. Whatever has been said about Germany in the past, is still true now.
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Comments
David Wilkins from UK
Monday, 04-02-08 00:02
@steve
Well talking of Audis and BMWs, it is not entirely true that the UK's industrial base has gone. As I always enjoy telling the many proud German car fans I know, all of the leading German auto manufacturers build their most expensive and sophisticated products in the UK; in the case of Porsche/VW it is Bentley, in the case of BMW, Rolls Royce, and in the case of Mercedes, it is the Mercedes-Benz SLR McLaren. That's because Britain is still very good at high end stuff; just look at sectors like aerospace, aero engines, pharma, F1 etc. - all of which are areas where it is hard to challenge just on the basis of cost advantage.
By contrast, if you analyse German car output, the mix is actually not very favourable from the point of view of resisting Asian competition. Although Germany of course makes many expensive and desirable cars that the whole world wants, output is largely made up of non-premium products, mainly because Germany has held on to most of GM's and Ford's European production capacity. Those jobs are going down the toilet in the medium term IMHO.
As for the UK's aim to get to 50% in higher education, I'm not sure whether it was right to have a crude target like this with a round number just to make good headlines - but I think any modern country needs more than Germany's higher education participation rate (IIRC about 20% - although its always difficult to compare these things between countries precisely because of the different types of institutions and qualifications and so on) in order to succeed.
In fact I think that far from having structural problems, the UK is one of the countries that is best adapted to globalisation. This is partly a question of attitude. Nobody is scared of international specialisation or FDI, and hardly anyone says a service job is worth less than a manufacturing job any more - not since the 1970s, anyway. Nokia/BenQ style protests are almost unimaginable in the UK; when a factory closes, the attitude is usually 'the market has spoken, let's find something else'.
steve from germany
Saturday, 02-02-08 21:33
well David,
I agree with much of what you say, but lets try and tackle two different issues which you raise.
Firstly, the German education system is organised to provide "workers" for Germany's industrial base, so as long as the industrial base does its job generating industrial jobs, then the system works. If however the industrial sector were to collapse, then the educational structure would make no sense any more.
Having said this it is important that the Uni's become much more competitive and flexible. The UK'aim to have 50% of the population graduate from a University is though just bollocks.
The UK has closed down its manufacturing base, so it is condemned to permanent balance of payments deficits, or to no longer buying Audi's or BMW's. The UK can not 'export nothing' but import 'lots of stuff', this is not a viable model.
As long as this is acceptable then the UK model will work just fine.
Secondly, the only jobs taht can't be exported are sales jobs, everythig else can go. Just look at the number of banks that have moved back office work to India, there is no reason why finacncials can't be out-sourced, its just a language thing.
So,although Germany has obvious structural problems, the UK has more, the recent financial boom decade has just papered over the cracks, thats all.
Regards
Steve
David Wilkins from UK
Thursday, 31-01-08 13:45
I don't think that Germany is a particularly wealthy or high-wage country these days. The problems for international competitiveness are probably more that non-wage labour costs (and therefore total employment costs) are still very high, and that Germany persists in trying to hold on to old manufacturing jobs - which are very vulnerable to low-wage competition from other countries - rather than creating the conditions for new jobs that are less susceptible to that competition.
It is true that financial services now account for a large proportion of UK jobs and this may yet prove to be a problem in current conditions, but by specialising in this area and several other service industries - accounting, law, consulting, media and so on the UK has created huge numbers of highly paid jobs that other countries have for several years found it remarkably difficult to lure away or reproduce. For years it was a widely held view that one of Britain's main problems was the fact that middle-class university graduates turned their noses up at getting their hands dirty doing engineering or manufacturing in favour professional/service jobs - now, unjust as it may seem, that looks like it has given us an advantage not a disadvantage.
As for Germany's education system, I think it's interesting how views on this have changed so much over the last ten years or so. Certainly until the so-called Pisa shock, education and training were considered German strengths rather than weaknesses, given such factors as the strong system of vocational training. It remains true that Germany turns out lots of people who are great at doing traditional jobs like tiling a wall or plumbing but it seems to fall down when it comes to equipping people for new industries or new ways of working. I've never studied at a German university but I've worked with lots of German graduates and I was always amazed that while they obviously had absorbed the content of what they had studied well, German graduates and even PhDs were often far less enquiring, flexible and challenging, or open to new ideas, than their British counterparts - not a good grounding for a fast-changing world where constant learning is required and knowledge continually has to be applied in new ways. In short, the German system just seems to teach its students a lot of stuff, rather than teaching them how to think, which is the aim of university education elsewhere. And it's only going to get worse as Germany fails to expand its higher education system as quickly as competitor countries, and dithers for years over questions such as the extent to which it should develop elite universities.
steve from germany
Wednesday, 30-01-08 21:37
Hi Martin,
its true, i didn't offer any suggestions, I was only pointing out that Munchau's piece made no sense as he basically decried the "attack"on Nokia as being likely to drive off FDI, but at the same time stated that permanently low wages are not the solution (remember, high labour costs are exactly why Nokia say that they want to leave).
Sweeden is a great example but a bad model. Germany is just too big an economy too make the Sweedish model work, for one thing we don't have the political consensus that you have (as you point out).
Like Japan, Germany is a very wealthy country and it will take quite a while before enough people get poor enough to realise that radical change is nesessary. I agree that the (old and inflexible) education system is the crucial long term problem, coupled with a huge and inneficient public sector. However, I suspect as well that as we see the UK and the US sliding into a recession with big falls in financial market employment (which are basically the only sectors worth talking about in either of those economies) then we shall start to hear less and less about the Anglo-Saxon miracle, much as we don't dear too much about the German miracle economy of the 60's and 70's.
Sweeden is a quirky country and may just carry on doing very well with its quirky model.
Regards
Steve
Martin from Sweden
Wednesday, 30-01-08 11:26
Dear Steve,
you say you're confused about Münchau's opinion? Well, yours isn't clear and forward-pointing at all, either.
I agree that German wages cannot decline for all times. Neither will that be beneficial for your ecomony as a whole.
Comparing Germany with well-performing countries like the US, UK or also Sweden, one realizes that the main bottleneck in the German economy between 1995 and 2005 has actually not even been the stagnating wages and weak private consumption (even though German media repeatedly complain about it), but the lousy gross fixed investion. There has hardly been any increase (+0.3% annually) in the investments in the last 15 years (except the success story of 2006 and 2007 which is about to end again), compared to medium annual increases of 3-5 precent in the US, UK, Netherlands, Scandinavia etc. And no investment will create no jobs - the situation Germany suffers from since 1994.
The view you're advancing, dear Steve, is getting you back to precisely 1995. Many Germans are completely ignoring economic relations (similar to the French). They require their politicians to be free from economic insights (since that may probably hurt "den kleinen Mann") - and that's indeed how your leaders act. I've been working in Munich some years ago, and I was totally shocked by the requirements you set on your politicians. You (or, better, the mean German) require them to increase wealth and pensions, reduce unemployment, but as soon as a politician tries to set any economically realistic plan, he's out of business. You Germans have a nice saying: "Wasch mir den Pelz, aber mach mich nicht nass." (english equivalent: "You can't have your cake and eat it, too.") You basically expect the best world from your politicians, but constrain them in a way they are not able to reasonably do anything.
Many Germans I know like the Scandinavian political system, not least the Swedish one. Many people are fascinated that it is possible to combine social welfare with economic growth and low unemployment. But the politicians need profound insight into ecomonics to make that work (at least I try to elect the policians who seem to do). I usually see more economic competence in the actions of the Swedish communists than the German SPD (even though our communists stand for a policy that is much more to the left). That's your main problem. You can have social fairness - but you have to know how to achieve it. As I experienced it, your politicians in Germany do not know it. Our Swedish system is far from being optimal, but a good deal better than the German one.
Furthermore, you completely ignore the main issues you have to face with in Germany. Your educational system is crap (that's know, though, but nothing is changed) and still releases 80% of your young people to low-qualified jobs. That's the actual reason why German wages do not raise. Your workforce is not adequately skilled for increasing wages. On the other hand, your economy suffers from a lack of high-qualified engineers, natural scientists etc. And even worse, many high-qualified young Germans leave the country and don't want to ever turn back. Here in Sweden, we're enjoying the potential of more and more German economic "refugees" (mostly young with tertiary education and willing to work hard - which means upper 20%). And there are many more Germans working in the US and the UK. I probably don't have to tell you how dramatic the loss of creativity will be if you can't change this situation soon. And believe me, those people are not concerned about stagnating wages or capital-oriented politics, but personal prospects, growth and also the peoples's attitudes.
Best regards,
Martin, Sweden
