The issue of Germany and sustainable domestic demand has been a common topic
in the context of the sovereign debt crisis in the Eurozone and a paper published
on Tuesday looks at options for policymakers.
Also on Tuesday it was reported that the recently announced
four-year German austerity program valued at €80bn will not be impacted
by news that the federal finance ministry is set for a €20bn
windfall this year due to higher-than-expected corporate tax
receipts and proceeds from a recent auction of spectrum for
fourth-generation mobile phone services.
US economist Tyler Cowen
commented on his blog: "The Germans see themselves as having made
the necessary wage adjustments, in
advance, and in a manner that Keynesian
economics is skeptical of. The Germans also
see themselves as having produced and
maintained true credibility about future
fiscal policy (how many other countriescan
claim that?) by a constitutional amendment,
a lot of tough talk, and arelatively robust
real economy. German bonds are a safe haven
investment, even though Germany's numbers,
such as the debt-GDP ratio, are not
overwhelmingly wonderful. That's a
testament to German public sector
Did I mention that -- after
unification -- the Germans tried (against
their will, they had to) more than a decade
of massive fiscal stimulus, and
subsidization of consumption, starting with
well underfull employment, and yet
withmediocre results? That wasn'tlong
And yet somehow it is a mystery, or a
strange annal in some long book of
Dogmengeschichte, that the Germans are not
more interested in Keynesian economics."
Despite massive public
spending since 1991, GDP per capita in the former East Germany is about 70%
of the level in the former Federal Republic. Convergence within
Germany or in the Eurozone, is a long process.
In Europe, without checking the facts, commentators and
economists can wrongly assume that the Germans are Europe's
biggest savers and have no memory of the fact that as recently
as 2003, Prof.
Hans-Werner Sinn of the Ifo institute, had a book published: Ist
Deutschland noch zu retten? (Can Germany Be Saved?) - - Its
blurb read: “Taxes keep
rising, the pension and health insurance systems are ailing.
More and more companies are going bankrupt or are leaving the
country. Unemployment has reached alarming levels. Germany is
outperformed by its neighbours. It’s growth rates are in the
cellar, and it can’t keep up with Austria, the Netherlands,
Britain or France. Germany has become the sick man of Europe. “
The sick man of Europe!
Recently, Prof. Sinn made the point that in 2008,
only 40% of German savings were invested domestically and while German banks
lacked prudence with some of their lending, Germany had not erected a fortress
with one-way autobahn routes.
Deutsche Bank Research says
in a paper
that during the last upswing, exports proved to be Germany’s
strongest growth engine. In the course of the economic crisis, however,
calls were heard that Germany should not focus solely on exports as
more domestic demand would help stabilise growth. Private demand is
concentrated primarily on services.
Economist Philipp Ehmer says that since the start of the decade Germany has registered a current account
surplus every year. Moderation in wage negotiations has made German industry
increasingly competitive and led to a current account surplus of nearly 8% of
GDP in boom year 2007 - - the highest surplus in 30
years. Germany is considered to be among the countries with the greatest trade
openness and boasts the second highest merchandise exports in the world.
A look at the other 15 Eurozone countries shows that only the Netherlands and
the much smaller Luxembourg registered a larger current account surplus in
relation to GDP during the last economic upswing (2004-2007). Compared with the
large Eurozone economies, the share of exports in GDP is disproportionately
high (roughly 50%) in Germany; in France, Italy and Spain the figure is only
30%. By contrast, domestic demand in Germany is relatively weak: its share in
GDP came to 96% in 2009, while the figure was approx. 103% in the large Eurozone
Ehmer says that while many policy instruments to boost private demand show fast effects,
there are currently no funds available to finance direct stimulation measures.
Open to trade = dependent on trade?
2004 and 2007, exports accounted for nearly two-thirds of total
economic growth in Germany. But a current account surplus in one
country automatically means a deficit in another. Substantial current
account imbalances have developed in some parts of the euro area. These
are closely linked to the debt problems in southern Europe. The
austerity measures now necessary in European export destinations
harbour sales risks for Germany's exporters. According to DBR
estimates, government debt in the industrial countries stands at an average 100% of GDP in 2010 and looks set to rise to
over 130% by 2020.
The global recession in 2009 also showed that excessive reliance on trade can be
harmful: within EMU, Germany was one of the hardest-hit economies in terms of
The paper says while there are services for which exports play an important part
(e.g. wholesale trade, IT services), it concentrates on domestically oriented services and,
among these, above all on industries that absorb a large part of private
The economist says that as nearly 90% of all goods purchased by consumers are sold via retail trade
outlets, this sector absorbs the lion’s share of household spending (€408bn). Within the services sector (excluding retail trade),
housing/home expenditure is the largest single cost factor for households,
accounting for €270bn or 40% of household spending on services. The next largest spending blocks are for the hotels &
restaurants sector and domestic tourism (12%) as well as insurance and finance
(11%). While less than 10% of total spending currently goes to health and
long-term care services as well as to education and telecommunications, these
items belong to the most dynamically growing spending blocks with annual growth
rates of 4-5% since the year 2000.
On average, household spending on services only grew by 2%
during this time, i.e. in line with GDP growth.
Ehmer says one of the reasons why some Anglo-Saxon and Asian economies, for instance,
boast larger services sectors than Germany is that, in these countries, more
people are employed in less productive, low-skilled jobs. Due to Germany’s
extensive social-security network there are fewer incentives to take up
such jobs. This limits the employment potential in the low-wage segment and
hence potential domestic growth. Also, there is little willingness in Germany to
pay people for doing simple jobs like packing shopping bags in the supermarket.
If such jobs were created, this would lead to higher product
prices as companies would pass on higher wage costs to customers to the extent
that this is tolerated by the price elasticities in the markets
In its Economic Survey,
the OECD recommends - - among other things - - that Germany seek to improve
education opportunities. According to the survey, globalisation will lead to
stronger demand for highly skilled labour in a knowledge-based economy.
The economist says while this is a suitable measure -- and thus a sensible
demand - - to safeguard the German economy's competitiveness, it will hardly
contribute to a stronger orientation towards the domestic market. First and
foremost, this would help exporting industry, as many knowledge-based
industries which would benefit from a better qualified workforce are engaged - -
directly or indirectly - - in export business. Within the industrial sector there
is a clear correlation, for example, between export intensity and knowledge
intensity. And even the most export-intensive and successful industries in the
world markets (with an export ratio in excess of 40%) were unable to increase
employment figures between 2000 and 2008, like German industry as a whole. Quite
the opposite was the case: roughly 10% of the workforce, or 330,000 jobs, were
cut. Hence it is difficult to create additional jobs, and increase purchasing
power as a result, by improving the policy framework in industry.
One way Germany could boost
employment in labour-intensive services sectors would be to abolish its
Zivildienst, community service to be carried out in
lieu of compulsory military service. Young men doing community service are
crowding out private-sector companies thanks to unmatchably low, government-subsidised
wages. However, such a move would increase
the cost of services!