The German patient - is there still hope?

A decade ago, in the economic boom after German unification, nothing seemed capable of stopping this country. Now, nothing seems capable of starting it. Like its neighbours, Germany is struggling to climb out of the recession. But unlike most of its EU partners, this country has become the perpetual loiterer, with problems that begun long before the current slump and seem likely to continue long after.

Once the European industrial engine, Germany has had either the slowest or second-slowest or second-slowest growth rate in Europe since 1995. On February 27 the German Government confirmed that the German economy had shrunk in the second half of 2001. The overall performance last year was a meagre 0.6 % GDP growth - the lowest of all EU member states.

Some analysts believe that German growth will revive in the second half of this year, but there is doubt about the pace. According to a poll conducted by the Cologne-based Institute of the Germany Economy among 44 employers' associations, 12 industrial branches expect output to stagnate whereas 19 branches presuppose falling figures. Merely 12 out of the 44 forecast a slight upturn.

That is bad news for everyone. Germany's economy ranks third after the United States and Japan, and it accounts for one third of the industrial output in Euroland. When Germany sneezes, the rest of Europe gets the flu.

There is a widespread assumption that Germany's problems merely stemmed from the global recession in 2001. The real problems, however, are home-made. Even last year, German engineering and machine tool industries achieved an export record of
$76 billion. That is 9% above the figure for 2000.

The president of Germany's Engineering Manucturers Diether Klingelnberg, is optimistic that after a short lull, demand and production will continue to rise in the second half of the year. Carmakers such as BMW, Mercedes and Volkswagen have all booked big increases in foreign sales, particularly in the United States; Puma AG, the sport shoe manufacturer, reported an 28 % increase of exports to the U.S.

However, as a major manufacturing country, particularly of industrial equipment and components, Germany has become over-dependent on exports. In 2001, the country's manufacturing industries achieved 37 % of their turnover abroad (1991: 27 %). That means any sneeze of the global economy can cause a very severe cold in Germany.

The extremely high price of labour and increasing social welfare contributions have prompted industrialists to trim down the workforce wherever possible. Even when the economy finally accelerated in 2000, unemployment never fell below 8.6 % and has now climbed back to 9.6%. In East Germany, it is nearly twice as high. Social expenditure is rising faster than the economic output in the largest EU country.

Germany's domestic deficit last year was 2.7% of the GDP, close to the limit of 3% set in the in the EU's stability and growth pact. The prospect that the Federal German Government could lose its top-notch, triple-A rating on world credit markets is no longer unthinkable.

These problems have produced acute embarrassment for Chancellor Gerhard Schroeder, who campaigned for office on the issue of reducing unemployment and who is up for re-election in September. Even if it hurts, a profound reform of the overweight welfare system and the de-regulation of the rigid labour market will become inescapable for the German patient.