We said in Part 1 that the European Commission (EC) on Wednesday announced that it would open an in-depth review of the German current account surplus - - a measure that includes the goods exports surplus, the services deficit and financial movements -- saying it will examine whether the Eurozone's biggest member should be doing more to boost domestic consumption and investment to help the Eurozone economy.
José Manuel Barroso, EC president, made clear that the review was not aimed at competitiveness of German industry or its broader economy. Officials pointed to the need for reform of the German service sector and the importance of raising infrastructure investment to stimulate demand.
“We would like to have more Germanys in Europe,” Barroso said. “Our problem could never be German competitiveness but whether Germany, the EU’s economic powerhouse, could do more to help the rebalancing of the EU economy.”
There is also concern that the German exports' engine is raising the euro's exchange rate, which creates a disadvantage for other countries.
Research shows that a rise in German demand would have a limited impact on peripheral economies.
European Commission economists calculated that a 1% rise in German domestic demand would mainly benefit domestic production and its effect on the German trade balance would amount to about 0.2% of GDP; the greatest benefits would be for the Czech Republic, followed by Slovakia, Hungary, Austria, and the Netherlands.
The trade balances of Spain, Italy and Portugal would gain 0.02% of GDP, and the Greek balance would be less.
The contrasting fortunes of the two biggest economies is stark. Is German success responsible for France's failures?
There are no soundbite answers. However, responsibility for most of France's woes cannot be put on Germany.
Germany's last balance of payment deficit (the trade balance and the balance
of payments with other countries e.g dividends, investment) was in 2000; France
has had a balance of payments deficit every year since 2005.
Employment and wages
Eurostat, the EU's statistics office, say that in 2012, average hourly labour costs in the whole economy (excluding agriculture and public administration) were estimated to be €23.4 in the EU27 and €28.0 in the euro area (EA17). However, this average masks significant differences between EU member states, with hourly labour costs ranging from €3.7 in Bulgaria, €4.4 in Romania, €5.8 in Lithuania and €6.0 in Latvia, to €39.0 in Sweden, €38.1 in Denmark, €37.2 in Belgium, €34.6 in Luxembourg, €34.2 in France and €30.4 in Germany.
The first chart here [pdf] shows that when non-pay costs are excluded the margin among the leaders narrows.
On Germany's borders, the hourly cost in Poland is €7.40 and €10.60 in the Czech Republic - - these rates suggest why pay in low skill service jobs tend to be low.
Germany is among the European countries with public social spending above 30% of GDP, compared with 33% in France and 20% in the US.
German and US real average hourly wages in the period 1985- 2010 using US and German data, rose a real 30% compared with 6% in the US.
In the early years of the last decade, in response to economic problems in the aftermath of high reunification spending, wages fell relative to other countries in the monetary union.
Matthew Dalton of The Wall Street Journal has a chart here in a blog post.
According to the Institute for Employment Research, the research unit of the federal employment agency, 25% of all German workers earn less than €9.54 per hour.
The OECD Survey of Germany 2012 says past labour market reforms, arguably the most significant among OECD countries during their time, significantly changed labour market institutions in Germany with positive effects on the reaction of unemployment during the crisis. However, the organisation said that there continues to be a divide between workers with short-term contracts and little job security, and workers in highly protected permanent jobs. In addition, the OECD said, German women work some of the shortest hours in the world because of a tax system that penalises working couples, and because of a lack of child care.
The OECD also said that German banks are more leveraged than their peers in Europe, and vulnerable to shocks. The report highlighted the publicly-owned Landesbanken which it said “still lack a viable business model.”
The reforms introduced by the government of
Gerhard Schröder a decade ago also introduced “mini jobs” in which people
could earn, untaxed, up to €400 a month.
The OECD says labour taxation is particularly high. The total tax wedge for a single individual without children and average income amounts to 39% of gross wage earnings compared to 24% in the average OECD country. The wedge is lower for families, but still exceeds the OECD average. This primarily reflects social security contributions, which are more than double the OECD average in terms of gross wage earnings. High non-wage labour costs are a major disincentive for employment, also because they set in at relatively low income levels.
Christian Noyer, Banque de France governor, said last May that GDP in Germany "contracted almost twice as much as in France in 2009." But Germany's greater labour-market flexibility allowed for a much faster rebound." France lost 500,000 jobs in that period, while German unemployment "remained stable," in part because businesses could cut working hours when growth slowed.
The global trend of rising temporary and part-time jobs has been reversed in Germany, reflecting the strong jobs market in 2012 and a widening skills shortage.
The number of German workers employed on a temporary or part-time basis fell by
about 146,00 people in 2012 to a total of 7.89m,
according to Destatis, the federal statistics office, last August.
The two biggest political parties which are discussing terms for a so-called grand coalition, are reported to have agreed on the introduction of a minimum wage at an hourly rate of €8.50.
Research published last January
showed that it would affect 19% of all people in dependent employment in
Germany. In absolute numbers, it would mean a pay rise for 6.1m workers -
- it would affect fewer people in Western Germany (16.4%) than in the former
communist-ruled Eat Germany (32.1%).
Germany has a huge advantage in the number of medium size (50-249 employees) and large firms at an estimated 64,000 compared with France's 25,000 and Italy's 22,000.
The French Treasury has said that 30% of French exporters fail to hold onto their market for more than a year. German SMEs, which are larger and more innovative, are also bigger exporters, with exports accounting for a larger share of their total revenue, and they also export more regularly.
The renowned Mittelstand medium size companies
have about 1,300 'Hidden Champions,' which lead in niche areas across the world.
In many global business sectors, there are just a
few dominant players: Industrial chemicals: BASF and Bayer of Germany compete
against themselves and their main global rivals are Dow Chemical and DuPont of
the US; Smartphones are dominated by Samsung and Apple; Flat screen TVs by
Korean and Japanese companies; SAP of Germany, Europe’s only significant
software firm competes against Oracle of the US; Volkswagen, Toyota and GM
dominate the car market; Siemens of Germany’s main competitor in the supply of
conventional power plants, sophisticated healthcare equipment, is General
Electric of the US; Big pharmaceutical firms in Europe are concentrated in the
UK, France, Germany, Switzerland, Denmark and Sweden, Elan which was founded by
an American in Ireland in 1969, has in recent years become almost a shell
operation with 150 employees worldwide.
ConclusionIt's unlikely that the European Commission will satisfy both Germany and its critics but it's nevertheless likely to be a useful project that will show the critics that the issues cannot be condensed into soundbites while for Germany highlighting areas of reform it needs to attend to, in particular in the services sector.
Germany is already facing an ageing crisis.
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