The German Patient is recovering - slowly

The Ifo index of business confidence in Germany - the most closely watched national index in the eurozone - rose by a full point in May to 91.5.

The rise indicated by the poll was primarily in business expectations, rather than in the business conditions part of the index. However, expectations are essential for recovery, as they suggest that companies may be confident enough to start investing again. The expectations part of the Ifo index rose by 1.4 points to 106.1.

The survey results follow news issued on May 23 that Germany's first-quarter domestic product grew by 0.2 percent, after contracting by 0.3 per cent in the final quarter of last year. Analysts polled by Reuters had forecast a quarterly growth of just 0.1 per cent.

Germany had slipped into recession late last year, along with the United States and Japan, after the global downward trend and the impact of the September 11 attacks in the United States slowed demand. German performance was worst by comparison with the rest of the euro zone, although it was in line with Germany's position at bottom of the West European business league over the past decade.

The more optimistic economists now expect the German economy to grow by 0.9 per cent for the rest of the year and by 2.4 per cent in 2003. The German Finance Ministry said on 24 May, it expected economic growth to accelerate considerably in the course of 2002, but the upswing would not have an impact on the unemployment level until the second half of the year.

This relatively poor showing is now becoming the subject of a heated debate in the run-up to the general elections on September 19 this year. Late in May, an 'Initiative for Germany' was launched by leaders of German top industries, banks and insurance companies such as Deutsche Bank, Siemens, Hochtief, Allianz, BASF and Lufthansa.

They sharply criticize the slackening acceptance of a free market economy among 'large parts' of the German population and demand a greater sense of individual responsibility and competition in the country. The former Siemens chairman, Herman Franz, in particular denounced the 'defeatist' attitude of blaming the global economy or the US performance for the ailments of the German economy in an effort to conceal the own immobility.

Germany's problems are an acute embarrassment for Chancellor Gerhard Schroeder, who campaigned for office on the issue of reducing unemployment and who is seeking re-election in September. The German economics minister, Werner Mueller, said in a German TV programme on 23 May that the government would more than ever promote commercial overseas commitments, not least in the Middle East.

A hint of spring is in the air after a cold and windy German winter, and people start to put away their thick coats and warm socks. However, the commercial chill in many boardrooms seems to linger on. 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 has 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. Only 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 the euro zone. When Germany falters, it drags the rest of Europe with it.

There is a widespread assumption that Germany's problems merely stem from the global recession in 2001. The real problems, however, are closer to home. Even last year German engineering and machine tool industries achieved record exports of
86 billion euros, 9 % above total exports for 2000. The President of Germany's Engineering Manufacturers 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 booked big increases in foreign sales, particularly in the United States; Puma AG, the sport shoe manufacturer, reported a 28 % increase of exports to the U.S.

However, Germany as a major manufacturing country, particularly of industrial equipment and components, have 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. 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.